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Update 12/12/2016: TSN gapped downward sharply after earnings were published but in subsequent weeks recovered about half of the loss. I exited with a profit.

Shares declined by 6.5% over 24 days, or a -99% annual rate. The options position produced a 113.5% yield on debit for a +1,728% annual rate.

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The chicken, beef and pork processing company Tyson Foods Inc. (TSN), headquartered in Springdale, Arkansas, publishes earnings on Monday before the opening bell.

TSN

I shall use the JAN series of options, which trades for the last time 63 days hence, on Jan. 20.

Ranges

Implied volatility stands at 44%, which is 3.4 times the VIX, a measure of volatility of the S&P 500 index. TSN’s volatility stands in the 95th percentile of its annual range. The price used for analysis was $67.17.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	79.48	91.78	70.90
Lower	54.86	42.56	63.45
Gain/loss	±$12.31	±$24.61	±$3.73

Implied volatility 1 and 2 standard deviations; central tendency earns moveThe Trade

TSN peaked Sept. 5 and then reversed downward, ending a rise lasting nearly eight years. The Elliott wave count suggests that the present move to the downside is the beginning of a major correction, but it is not a certainty.

The price since September is in the fifth wave of its decline, suggesting that a reversal to the upside is near. Such a reversal would be a counter-trend correction, and I would expect it to stay well below the September peak.

Zacks Investment Research gives TSN a neutral rating, with some suggestion in recent analysts’ alterations of their assessments that a negative earnings surprise is expected.

TSN’s brokerage coverage is slim, but in aggregate they come down with a 33% enthusiasm rating, with two thirds of six analysts issuing strong buy recommendations.

The stock’s price has risen in the trading session after three of the last four earnings announcements.

I’ll construct a direction neutral trade skewed to the downside.

Iron condor, short the $72.50 calls and long the $75 calls,
short the $57.50 puts and long the $55 puts,
sold for a credit and expiring Jan. 21.
Probability of expiring out-of-the-money

JAN	Strike	OTM
Upper	72.50	74.3%
Lower	57.50	80.6%

The premium is $0.79, which is 32% of the width of the position’s wings.

The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $5.15, and the average was $3.26. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.73.

Decision for My Account

I have entered a position on TSM as described above. The stock at the time of entry was priced at $67.22.

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Alerts

Disclaimer

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.

License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Update 2/14/2017: I exited my dividend play on STWD after 261 days divided into two periods: May 6, 2016 to July 18, 2016, and Aug. 10, 2016 to Feb. 14, 2016. Shares rose in the first period and were mainly sideways in the second.

I exited the position in order to free up funds for other purposes. 

Overall for both periods, shares rose by 4.6% over 261 days, or a +261% annual rate. The positions, shares and dividends, produced an 8.4% yield on debit for a +12% annual rate.

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Starwood Property Trust Inc. (STWD), an affiliate of the closely held Starwood Capital Group headquartered in Greenwich, Connecticut, is a real-estate investment trust specializing in commercial properties,

I considered STWD as a dividend play and bought shares on Friday, May 6, without a full analysis. I need a place to park money that isn’t committed to my more lucrative volatility strategy during this time of low implied volatility.

[STWD in Wikipedia]

STWD

The Company

Like all REITs, STWD is required to payout 90% of earnings as dividends, a relationship called the Dividend Payout Ratio. STWD has a ratio of 102.7%.

Analyst enthusiasm is positive, coming down collectively at a 50% enthusiasm rating.

The company reports  return on equity of 9%, with debt running at 146% of equity.

Earnings have been profitable in all of the past 12 quarters. Ten quarters have produced upside surprises. The most recent of the downside surprise was this year’s 1st quarter.

The earnings yield is 7.38%, compared to a 1.75% yield on 10-year U.S. Treasury notes. The dividend yield is 9.51% annualized at today’s prices.

The “fair” price implied by earnings growth estimates is $31.62 per share, compared to the market price of $20.18 per share. The market price is 36.17% below the implied price.

The stock is selling at 13.5 times earnings and also at a premium to sales. It takes $6.34 in shares to control a dollar in sales.

Institutions own 73% of shares.

STWD next publishes earnings on Aug. 2. The stock goes ex-dividend on June 28 for a quarterly payout of $0.48 per share.

On average STWD trades 1.7 million shres per day with a one cent bid/ask spread.

Decision for My Account

I bought shares of STWD on Friday, May 6, for $19.65 per share.

The dividend is attractive and the fundamentals are good. The stock is underpriced by the PEGY standard. The biggest risk, in my opinion, is the general risk of a return to recession, an event that ought to have sufficient warning to allow for an orderly exit.

Exit Strategy

I’ve set my original exit point according to the one standard deviation mark, using the same options series, the JUN, as I would use for a short-term trade. That sets a lower bound of $18.07, or $1.58 below the entry price.

The share price has dropped on each of the last four ex-dividend dates, a normal behavior for high-dividend plays. The average decline has been $0.54; the maximum, $0.70; and the central tendency, with the outliers eliminated, $0.63.

I shall update the lower bound according to the current standard deviation as the next option series comes into play on the calendar. By my rules, I change option series when the current series falls below 30 days until expiration.

I’ll update this post when the exit point changes.