PAY Analysis

VeriFone Systems Inc. (PAY)

PAY publishes earnings on Thursday after the closing bell.

I shall use options that trade for the last time eight days hence, on Sept. 15.

Implied volatility stands at 48%, which is 4.1 times the VIX, a measure of the volatility of the S&P 500 index.

PAY’s IV stands in the 62nd percentile of its annual range and at the peak percentile of its most recent broad movement.

The price used for analysis was $19.42.

Premium: $1.58 Expire OTM  
PAY-iron fly Strike Odds Delta
Long 23.00 92.4% 9
Break-even 21.58 ~85.0% 18
Short 20.00 61.6% 43
Short 20.00 38.3% 57
Break-even 18.58 ~70.0% ~25
Long 17.00 82.6% 14

The premium is 53% of the width of the position’s wings.

The risk/reward ratio is 0.9:1.

The zone of profit in the proposed trade covers a $1.50 move either way. The biggest immediate move after each of the past four earnings announcements was $3.29, and the average was $1.65. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.34.

The expected move covering 85% of occurrences is $1.92, beyond the $1.50 break-even width.

The bid/ask spread is 13.6%.

Decision for My Account

There is much to dislike about this potential trade:

1) The distance between strikes unbalances the short legs of the position. I prefer that they be close to 50%, and certainly not 7 points away, as is the case in this set-up.

2) The bid/ask spread is wide; I prefer 10% or under.

3) The premium falls short of covering the expected move, the maximum move among the last four earnings, and the average move among the four. Only the most restricted, the central tendency, is covered. That’s too parsimonious for my taste.

4) Finally, the beta on PAY is 1.87, meaning that a 1% move in the S&P 500 will alone move PAY nearly double that, at 1.87%. That adds extra and unwanted bump to this stock’s possible response to an earnings announcement.

I’m passing on PAY. No trade.

By Tim Bovee, Portland, Oregon, Sept. 7, 2017


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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