CVS Analysis

CVS Health Corp. (CVS)

CVS publishes earnings on Monday before the opening bell.

I shall use options that trade for the last time 14 days hence, on Nov. 17.

Implied volatility stands at 38%, which is 4.1 times the VIX, a measure of the volatility of the S&P 500 index.

CVS’s IV stands in the 88th percentile of its annual range and the 87th percentile of its most recent broad movement.

The price used for analysis was $69.53.

Premium: $2.87 Expire OTM
CVS-iron fly Strike Odds Delta
Calls 76.00 88.8% 13
Break-even 72.87
Short 70.00 56.3% 47
Short 70.00 43.6% 53
Break-even 66.87
Long 64.00 82.3% 16

The premium is 47.6% of the width of the position’s wings.

The risk/reward ratio is 1.1:1.

The zone of profit in the proposed trade covers a $3 move either way. The biggest immediate move after each of the past four earnings announcements was $9.86, and the average was $3.35. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.64.

The expected move covering 85% of occurrences is $3.60, beyond the profit zone.

The bid/ask spread is 13.6%.

Decision for My Account

As originally constructed, with the long wings at the 10 delta mark ($77 and $63), the risk/reward ratio was overly high, at 1.3:1. I narrowed the wings by a dollar on either side, getting an acceptable risk/reward ratio but at the cost of widening the bid/ask spread and narrowing the profit zone.

Either way, the result fails to meet my standards, and I am passing on CVS today.

By Tim Bovee, Portland, Oregon, November 3, 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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