MS Analysis

Morgan Stanley (MS)

Update 10/17/2017: MS published earnings of $0.93 per share, beating the Street estimate by nine cents. The share price fell by nearly a dollar and then rose by about a dime, thereafter swinging into a very narrow sideways micro-trend.

I exited at 2% of maximum potential profit, well below my 25% target. I trade small positions, so the profit was barely enough to pay my trading fees. 

Shares showed a net rise of 71 cents from entry to exit, less than half of the expected move and within the central tendency of the last four post-earns moves.

Zacks gave MS a 0.25 score after running its earnings surprise predictor algorithm; the beta is 1.61

Shares rose by 1.5% during my one-day holding period, or a +530% annual rate. The options position produced a 2.0% return for a +740% annual rate.

MS publishes earnings on Tuesday before the opening bell.

I shall use options that trade for the last time 11 days hence, on Oct. 27.

Implied volatility stands at 25%, which is 2.6 times the VIX, a measure of the volatility of the S&P 500 index.

MS’s IV stands in the 39th percentile of its annual range and the 76th percentile of its most recent broad movement.

The price used for analysis was $48.56.

Premium: $1.51 Expire OTM
MS-iron fly Strike Odds Delta
Calls 51.50 90.7% 10
Break-even 50.01
Short 48.50 48.9% 53
Short 48.50 51.3% 47
Break-even 47.01
Long 45.50 89.0% 10

The premium is 50.3% of the width of the position’s wings.

The risk/reward ratio is 1:1.

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 $1.48, and the average was $0.91. After eliminating the maximum and minimum post-earnings movements, the central tendency is $0.77.

The expected move covering 85% of occurrences is $1.50, identical to the profit zone.

The bid/ask spread is 7.2%.

Decision for My Account

I have entered a position on MS as described above. The stock at the time of entry was priced at $48.62.

By Tim Bovee, Portland, Oregon, October 16, 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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