ETN Analysis

Eaton Corp. plc (ETN)

ETN publishes earnings on Tuesday after the closing bell.

I shall use options that trade for the last time 11 days hence, on Nov.. 10.

Implied volatility stands at 24%, which is 2.3 times the VIX, a measure of the volatility of the S&P 500 index.

ETN’s IV stands in the 53rd percentile of its annual range and at the peak of its most recent broad movement.

The price used for analysis was $79.46.

Premium: $2.65 Expire OTM
ETN-iron fly Strike Odds Delta
Calls 84.00 89.5% 11
Break-even 82.15
Short 79.50 52.4% 50
Short 79.50 47.6% 50
Break-even 75.65
Long 73.00 83.2% 15

The premium is 48.2% of the width of the position’s wings.

The risk/reward ratio is 1.5:1.

The zone of profit in the proposed trade covers a $3.25 move either way. The biggest immediate move after each of the past four earnings announcements was $6.11, and the average was $3.50. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.97.

The expected move covering 85% of occurrences is $2.98, within the profit zone.

The bid/ask spread is 26.0%.

Decision for My Account

The bid/ask spread has widened to an unacceptable level by my standards. Also, the risk/reward ratio, at 1.5:1, is greater than my normal maximum of 1.2:1. Also, the average post-earns move exceeds the profit zone, although the central tendency lies within. But the bid/ask spread and risk/reward ratio are the two deal-killers. No trade.

By Tim Bovee, Portland, Oregon, October 30, 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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