LOW Analysis

Lowe’s Companies Inc. (LOW)

LOW publishes earnings on Tuesday before the opening bell.

I shall use options that trade for the last time 11 days hence, on Dec. 1.

Implied volatility stands at 27%, which is 2.5 times the VIX, a measure of the volatility of the S&P 500 index.

LOW’s IV stands in the 64th percentile of its annual range and the 76th percentile of its most recent broad movement.

The price used for analysis was $81.76.

Premium: $3.26 Expire OTM
LOW-if Strike Odds Delta
Calls 88.00 91.8% 9
Break-even 85.26
Short 82.00 54.6% 48
Short 82.00 45.4% 52
Break-even 79.26
Long 76.00 85.4% 13

The premium is 54% of the width of the position’s wings.

The risk/reward ratio is 0.8:1.

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 $7.08, and the average was $3.60. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.65.

The expected move covering 85% of occurrences is $3.32, beyond the profit zone.

The bid/ask spread is 5.5%.

Decision for My Accountg

Ten percent of the expected move isn’t covered by the profit zone, and the intervals between strikes won’t allow me to widen it any further. The price movement post-earnings of the last four announcements are on average bell beyond the profit zone, although the central tendency lies within it.

All in all, I’m coming down on the side of caution, in part because this is a holiday week, which increases the irrationality of the markets, in my experience, and also, because the markets are undergoing what appears to me to be topping behavior, which increases volatility of the post-earns moves. I’m passing on the trade.

By Tim Bovee, Portland, Oregon, November 20, 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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