Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 declined during the session, reaching below the pre-session low. The second alternative from this morning has proven to be correct. The upward correction that began on May 2, wave 2{-10}, is still underway. Within it, wave B{-11} may still be underway, or it may have ended at the session low so far, 4062 on the futures — the wave pattern is somewhat ambiguous.

This morning’s chart somehow never made it in to the post, although it did show up on the Twitter update (@timbovee) and the Facebook update (@PrivateTrader). For this update, I’ve added in chart a showing the S&P 500 futures as of 3:30 p.m.

2 p.m. New York time

MGM earnings play exit. I’ve exited my short bull put vertical spread for 57.1% of maximum potential loss and have updated the trade analysis with results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures reached a low on Thursday of 4099.25, dawdled sideways for much of the night, and then rose as the opening bell approached.

What does it mean? Thursday’s low was the end of the middle wave of the upward correction that began on May 2.

What’s the alternative? It’s possible that the correction is of a larger scale that it first appeared to be.

It’s also possible the middle wave may not have ended.

[S&P 500 E-mini futures at 3:30 p.m., 45-minute bars, with volume]

What does Elliott wave theory say? The upward correction is wave 2{-10} within downtrending wave 3{-9}, which began on April 28. The sharp decline from Wednesday to Thursday was the middle wave, B{-11}, within the three-wave correction, and this morning’s rise is the first step within wave C{-11}. Under the rules of Elliott wave analysis, wave 2{-10} cannot exceed the end of the preceding 1st wave, meaning that the April 28 high, 4305.50, is an absolute ceiling for wave C{-11}.

Alternatively, wave 3{-9} ended on May 2 at 4056, the upward correction is wave 4{-9}, the decline that ended Thursday was the middle internal wave, B{-10}, and the present rise is wave C{-10}. Fourth waves, under the Elliott wave rules, can exceed the start of the preceding 1st wave, and so a price rise above 4305.50 will signal that this alternative count is correct.

I discussed the issue detail in the Elliott wave section of yesterday’s Trader’s Notebook.

Under the second alternative, wave C{-11} has not yet begun and wave B{-11} will dip still lower. This scenario will be confirmed if the price drops below 4099.25.

We Are Here.

These are the waves currently in progress under my principal analysis. Each line on the list shows the wave number, with the subscript in curly brackets, the traditional degree name, the starting date, the starting price of the S&P 500 E-mini futures, and the direction of the wave.

  • Index:
  • 5{0} Intermediate, 12/26/2018, 2346.58 (up)
  • 4{-1} Minor, 1/4/2022 4818.62 (down)
  • 1{-2} Minute, 1/4/2022 4818.62 (down)
  • Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • Futures:
  • 1{-4} Subminuette, 1/4/2022, 4808.25 (down)
  • 1{-5} Micro, 1/4/2022, 4808.25 (down)
  • 1{-6} Submicro, 1/4/2022, 4808.25 (down)
  • 5{-7} Minuscule, 3/29/2022, 4631 (down)
  • 5{-8} Subminuscule, 4/21/2022, 4509, (down)

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it in his book Science and Sanity (1933), “The map is not the territory … The only usefulness of a map depends on similarity of structure between the empirical world and the map.” And I would add, in the ever-changing markets, we can judge that similarity of structure only after the fact.

See the menu page Analytical Methods for a rundown on where to go for information on Elliott wave analysis.

By Tim Bovee, Portland, Oregon, May 6, 2022

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
Creative Commons 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.

Trader’s Notebook

12:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 declined sharply during the session, reaching below 4102, which is 201 points below Monday’s high of 4303. The price never exceeded Monday’s high, and so my principal analysis stands: Wave 2{-10}, an upward correction is underway and internally is in the second of three waves, Wave B{-11}. The B wave will be followed by a rising wave C{-11} that likely will reach above Monday’s high, which was the end of wave A{-11}. The rule I discussed this morning still stands. Wave 2{-10} and the C wave within must remain below 4305.50, the starting point of the preceding downtrending wave 1{-10}, which began on April 28. If it moves above that level, then the present wave count will be revised. I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to rise in overnight trading, coming to within three points of the prior peak, 4305.50, attained on April 28.

What does it mean? The upward correction that began on May 2 continues.

What’s the alternative? Had the price moved above 4305.50, or if it does so today, then the present size designation of the upward correction would no longer match the chart and would require a reanalysis. For a detailed discussion, see the “Elliott wave theory” below.

[S&P 500 E-mini futures at 3:30 p.m., 45-minute bars, with volume]

What does Elliott wave theory say? A larger downtrend, wave 5{-8}, began on April 21, and all that we’ve been tracking since has been within that wave. The question is, where do the subsequent wave fit in comparison with wave 5{-8}.

Under my principal analysis, I marked the chart as showing waves of increasingly smaller size. Wave 1{-9} within wave 5{-8} ended on April 26 and wave 2{-9} on April 28. But I labeled the next decline, beginning wave 3{-9}, as wave 1{-10}, the first subwave, which peaked at 4305.50. Under my analysis, the subsequent rise from 4056 on May 2 to 4303 on May 4 is wave 2{-10}, in the form of a subwave, A{-11}, which peaked at 4303.

And that’s a developing problem with the analysis. Second waves never move beyond the start of the preceding 1st wave. This 2nd wave, with its A wave, has come to within three points of that 1st wave starting point. Wave B can be expected to carry the price quite a distance downward. Wave C usually moves beyond the end of wave A. And the problem is, there’s not much space left for that move beyond — only 2-1/2 points. So it’s doable, but it’s inelegant.

If the price does break beyond 4305.50, then the analysis will no longer match the chart — the map will no longer match the territory — and so let’s look at a potential reanalysis.

The most likely, in my opinion, would take wave 1{-9}, which ended on May 2, and move it up a degree, relabeling it as the end of wave 1{-8}. The subsequent rise that ended on April 28, now labeled wave 2{-9}, would be wave A{-9} within wave 2{-8}. The decline that followed, ending on May 2, would be renumbered to B{-9} within 2{-8}. And the label on Wednesday’s rise would change from wave A{-11} to wave C{-9}, most likely the final subwave of the parent wave 2{-8}.

That’s the alternative analysis. In some ways it’s more elegant that the principal analysis. But elegance isn’t everything, and I’m not yet ready to promote this alternative to the top spot.

These are the waves currently in progress under my principal analysis. Each line on the list shows the wave number, with the subscript in curly brackets, the traditional degree name, the starting date, the starting price of the S&P 500 E-mini futures, and the direction of the wave.

We Are Here.

  • Index:
  • 5{0} Intermediate, 12/26/2018, 2346.58 (up)
  • 4{-1} Minor, 1/4/2022 4818.62 (down)
  • 1{-2} Minute, 1/4/2022 4818.62 (down)
  • Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • Futures:
  • 1{-4} Subminuette, 1/4/2022, 4808.25 (down)
  • 1{-5} Micro, 1/4/2022, 4808.25 (down)
  • 1{-6} Submicro, 1/4/2022, 4808.25 (down)
  • 5{-7} Minuscule, 3/29/2022, 4631 (down)
  • 5{-8} Subminuscule, 4/21/2022, 4509, (down)

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it in his book Science and Sanity (1933), “The map is not the territory … The only usefulness of a map depends on similarity of structure between the empirical world and the map.” And I would add, in the ever-changing markets, we can judge that similarity of structure only after the fact.

See the menu page Analytical Methods for a rundown on where to go for information on Elliott wave analysis.

By Tim Bovee, Portland, Oregon, May 5, 2022

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
Creative Commons 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.

Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 rose swiftly after the Federal Open Market Committee announced it was raising the Federal Funds rate by half a percent. An upward correction, wave 2{-10}, continues. It is a subwave within downtrending wave 3{-9}. No change in the analysis. I’ve updated the chart.

3 p.m. New York time

SBUX earnings play exit. I’ve exited my short bear call vertical spread on SBUX for 87.5% of maximum potential loss and have posted an update of the trade analysis with results.

2:45 p.m. New York time

AMD earnings play exit. I’ve exited my short bear call vertical spread on AMD for a 53.6% of maximum potential loss and have posted an update of the trade analysis with results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures climbed slightly in overnight trading but remained below Tuesday’s high, 4195.75

What does it mean? The upward correction that began on May 5 continues, a subwave within a larger downtrend that began on April 28.

What’s the alternative? The correction may be one degree larger than I’ve labeled it. Under this scenario, the April 28 downtrend ended on May 5 and the subsequent rise is an upward correction within a larger downtrend that began on April 21.

[S&P 500 E-mini futures at 3:30 p.m., 85-minute bars, with volume]

What does Elliott wave theory say? Under my principal analysis, the rise that began on May 5 is wave 2{-10}, an upward correction within wave 3{-9}, which began on April 28.

Under my alternative analysis, the rise from May 5 is wave 4{-9}, an upward correction. Its predecessor, wave 3{-9}, ended on May 5.

Both the principal and the alternative are happening within wave 5{-8}, which began on April 21.

We Are Here.

These are the waves currently in progress under my principal analysis. Each line on the list shows the wave number, with the subscript in curly brackets, the traditional degree name, the starting date, the starting price of the S&P 500 E-mini futures, and the direction of the wave.

  • Index:
  • 5{0} Intermediate, 12/26/2018, 2346.58 (up)
  • 4{-1} Minor, 1/4/2022 4818.62 (down)
  • 1{-2} Minute, 1/4/2022 4818.62 (down)
  • Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • Futures:
  • 1{-4} Subminuette, 1/4/2022, 4808.25 (down)
  • 1{-5} Micro, 1/4/2022, 4808.25 (down)
  • 1{-6} Submicro, 1/4/2022, 4808.25 (down)
  • 5{-7} Minuscule, 3/29/2022, 4631 (down)
  • 5{-8} Subminuscule, 4/21/2022, 4509, (down)

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it in his book Science and Sanity (1933), “The map is not the territory … The only usefulness of a map depends on similarity of structure between the empirical world and the map.” And I would add, in the ever-changing markets, we can judge that similarity of structure only after the fact.

See the menu page Analytical Methods for a rundown on where to go for information on Elliott wave analysis.

By Tim Bovee, Portland, Oregon, May 5, 2022

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
Creative Commons 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.

AMD Trade

Advanced Micro Devices Inc. (AMD)

Update 5/4/2022: I exited my short bear call vertical spread on AMD, 44 days before expiration, for a $1.95 debit per contract/share, a loss before fees of $53 per contract. Shares were trading at $97.92, up $7.86 from the entry level.

The Implied Volatility Rank at exit was 66.1%, down 16.8 points from the entry level.

I exited on the day after entry, for 53.6% of maximum potential loss, because the position moved opposite the direction of my trade and I judged a fast exit to be the best way of limiting my loss.

Shares rose by 8.7% over one day for a +3,186% annual rate. The options position produced a 27.2% loss for a -9,921% annual rate.


I have entered a short bear call vertical spread on AMD, using options that trade for the last time 45 days hence, on June 17. The premium is a $1.42 credit per contract share and the stock at the time of entry was priced at $90.06.

The Implied Volatility Ratio stood at 82.9%.

Premium:$1.42Expire OTM
AMD-bear call spreadStrikeOddsDelta
Calls
Long105.0077.0%30
Break-even101.4273.5%34
Short100.0070.0%38

The premium is 56.8% of the width of the position’s short/long spread. The profit zone covers a 12.6% move to the upside and an unlimited move to the downside.

The risk/reward ratio is 2.5:1, with maximum risk of $358 and maximum reward of $142 per contract.

How I chose the trade. The trade was placed to coincide with AMD’s earnings announcement, after the closing bell on the day of entry. The short strikes were set to coincide with the expected move of $7.34 either way, based on options pricing, which gives a price range of $82.73 to $97.40.

By Tim Bovee, Portland, Oregon, May 3, 2022

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
Creative Commons 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.

SBUX Trade

Starbucks Corp. (SBUX)

Update 5/4/2022: I exited my short bear call vertical spread on SBUX, 44 days before expiration, for a $2.80 debit per contract/share, a loss before fees of $100 per contract. Shares were trading at $78.37, $0.30 from the entry level.

The Implied Volatility Rank at exit was 62.6%, down 29.5 points from the entry level.

I exited on the day after entry, for 87.5% of maximum potential loss, because the stock moved against the direction of the trade and I judged that exiting early would avoid even greater losses.

Shares fell by 0.4% over one day for a 139.2% annual rate. The options position produced a 35.7% loss for a -13,036% annual rate.


I have entered a short bear call vertical spread on SBUX, using options that trade for the last time 45 days hence, on June 17. The premium is a $1.80 credit per contract share and the stock at the time of entry was priced at $73.87.

The Implied Volatility Ratio stood at 92.1%.

Premium:$1.80Expire OTM
SBUX-bear call spreadStrikeOddsDelta
Calls
Long80.0077.0%27
Break-even76.8067.5%37
Short75.0058.0%47

The premium is 72% of the width of the position’s short/long spread. The profit zone covers a 4% move to the upside and an unlimited move to the downside.

The risk/reward ratio is 1.8:1, with maximum risk of $180 and maximum reward of $320 per contract.

How I chose the trade. The trade was placed to coincide with SBUX’s earnings announcement, after the closing bell on the day of entry. The short strikes were set to coincide with the expected move of $3.63 either way, based on options pricing, which gives a price range of $70.24 to $77.50.

By Tim Bovee, Portland, Oregon, May 3, 2022

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
Creative Commons 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.

Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 continued to rise during the trading session, as an upward correction — wave 2{-9} — continued. No change in the analysis. I’ve updated the chart.

1:55 p.m. New York time

AMD earnings play entry. I’ve entered a bear call options spread on AMD, timed to coincide with today’s earnings announcement after the closing bell, and have posted a trade analysis.

1:40 p.m. New York time

SBUX earnings play entry. I’ve entered a bear call options spread on SBUX, timed to coincide with today’s earnings announcement after the closing bell, and have posted a trade analysis.

1:10 p.m. New York time

MOS earnings play exit. I’ve exited my bull put options spread on MOS for 25% of maximum potential profit and have updated the trade analysis with results.

12:55 p.m. New York time

GILD earnings play exit. I’ve exited my bull put options spread on GILD for 45% of maximum potential loss and have updated the trade analysis with results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to rise in overnight trading, reaching 117.75 points above the prior day’s turning point, 4056, and then turning down.

What does it mean? The rise is a low-level upward correction that will be followed by a resumption of the downtrend that began on April 28.

What’s the alternative? The puzzle during the correction will be to understand the size of each wave in relation to the others. After the overnight peak, the price pulled back a little, and the significance of that will depend upon the labeling of the declining wave’s degree. So far, the correct degree subscript for the internal wave is far from clear.

[S&P 500 E-mini futures at 3:30 p.m., 85-minute bars, with volume]

What does Elliott wave theory say? The decline from April 28 was wave 1{-10} and the rise that has followed is wave 2{-10}, both within wave 3{-9}, which in turn is a subwave of wave 5{-8}, its parent, 5{-7}, and the grandparent, 1{-6}, which began on January 4.

Wave 2{-10} will most likely have three waves within it, and since it’s a 2nd wave, it will probably take the form of a Zigzag pattern, with internal wave A in turn having five internal waves; B, three internals; and C, five internals.

When wave 2{-10} is complete, it will be followed by wave 3{-10}, a push to the downside that will carry the price below Monday’s reversal point, 4056, and perhaps significantly so.

We Are Here.

These are the waves currently in progress under my principal analysis. Each line on the list shows the wave number, with the subscript in curly brackets, the traditional degree name, the starting date, the starting price of the S&P 500 E-mini futures, and the direction of the wave.

  • Index:
  • 5{0} Intermediate, 12/26/2018, 2346.58 (up)
  • 4{-1} Minor, 1/4/2022 4818.62 (down)
  • 1{-2} Minute, 1/4/2022 4818.62 (down)
  • Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • Futures:
  • 1{-4} Subminuette, 1/4/2022, 4808.25 (down)
  • 1{-5} Micro, 1/4/2022, 4808.25 (down)
  • 1{-6} Submicro, 1/4/2022, 4808.25 (down)
  • 5{-7} Minuscule, 3/29/2022, 4631 (down)
  • 5{-8} Subminuscule, 4/21/2022, 4509, (down)

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it in his book Science and Sanity (1933), “The map is not the territory … The only usefulness of a map depends on similarity of structure between the empirical world and the map.” And I would add, in the ever-changing markets, we can judge that similarity of structure only after the fact.

See the menu page Analytical Methods for a rundown on where to go for information on Elliott wave analysis.

By Tim Bovee, Portland, Oregon, May 3, 2022

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
Creative Commons 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.

MOS Trade

The Mosaic Co. (MOS)

Update 5/d/2022: I exited my short bull put vertical spread on MOS, 45 days before expiration, for a $0.93 debit per contract/share, a profit before fees of $31 per contract. Shares were trading at $65.04, up $2.32 from the entry level.

The Implied Volatility Rank at exit was 68.9%, down 31.3 points from the entry level.

I exited on the day after entry because the position reached 25% of maximum potential profit, my normal exit point for earnings plays.

Shares rose by 3.7% over one day for a +1,350% annual rate. The options position produced a 33.3% return for a +12,167% annual rate.


I have entered a short bull put vertical spread on MOS, using options that trade for the last time 46 days hence, on June 17. The premium is a $1.24 credit per contract share and the stock at the time of entry was priced at $62.72.

The Implied Volatility Ratio stood at 100.2%.

Premium:$1.24Expire OTM
MOS-bull put spreadStrikeOddsDelta
Calls/Puts
Long50.0077.0%17
Break-even56.2471.5%21.5
Short55.0066.0%26

The premium is 49.6% of the width of the position’s short/long spread. The profit zone covers a 10.3% move to the downside and an unlimited move to the upside.

The risk/reward ratio is 3.0:1, with maximum risk of $376 and maximum reward of $124 per contract.

How I chose the trade. The trade was placed to coincide with MOS’s earnings announcement, after the closing bell on the day of entry. The short strikes were set to coincide with the expected move of $5.13 either way, based on options pricing, which gives a price range of $57.71 to $67.97.

By Tim Bovee, Portland, Oregon, May 2, 2022

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
Creative Commons 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.

MGM Trade

MGM Resorts International (MGM)

Update 5/6/2022: I exited my short bull put vertical spread on MGM, 42 days before expiration, for a $2.06 debit per contract/share, a loss before fees of $67 per contract. Shares were trading at $39.02, down $2.75 from the entry level.

The Implied Volatility Rank at exit was 76.8%, down 14.9 points from the entry level.

I exited four days after entry, for 57.1% of maximum potential loss, because the position reached moved contrary to the direction of my trade and showed no sign of reversing.

Shares fell by 6.6% over four days for a -601% annual rate. The options position produced a 32.5% loss for a -2,968% annual rate.


I have entered a short bull put vertical spread on MGM, using options that trade for the last time 46 days hence, on June 17. The premium is a $1.39 credit per contract share and the stock at the time of entry was priced at $41.77.

The Implied Volatility Ratio stood at 91.7%.

Premium:$1.39Expire OTM
MGM-bull put spreadStrikeOddsDelta
Puts
Long35.0076.0%18
Break-even41.3965.0%28.5
Short40.0054.0%39

The premium is 55.6% of the width of the position’s short/long spread. The profit zone covers a 0.9% move to the downside and an unlimited move to the upside.

The risk/reward ratio is 2.6:1, with maximum risk of $361 and maximum reward of $139 per contract.

How I chose the trade. The trade was placed to coincide with MGM’s earnings announcement, after the closing bell on the day of entry. The short strikes were set to coincide with the expected move of $2.53 either way, based on options pricing, which gives a price range of $39.24 to $44.30.

By Tim Bovee, Portland, Oregon, May 2, 2022

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
Creative Commons 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.

Trader’s Notebook

Note: Over the weekend, I posted a discussion of changes that I’m making in my earnings play strategy.

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 continued to decline during the session, with each tick lower adding credibility to the scenario that says the decline that began on April 21 has resumed as a 3rd wave. Whether it’s wave 3{-9}, as I have it in my principal analysis, or something smaller, wave 3{-10} or even wave 3{-11}, is still up in the air. In any case, internally it is in its 5th wave — wave 5{-10} as I’ve marked the chart, but it could turn out to be wave 5{-11} or even something smaller. I’ve the updated the chart.

2:45 p.m. New York time

MOS earnings play entry. I’ve entered a bull put vertical spread on MOS and have posted an analysis of the trade.

2:35 p.m. New York time

MGM earnings play entry. I’ve entered a bull put vertical spread on MGM and have posted an analysis of the trade.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to fall after trading resumed overnight, in a pattern that places the end of the upward correction at the April 28 peak.

What does it mean? Under my principal analysis, the downtrend that began on April 21 has resumed.

What’s the alternative? The ambiguity lies in the placement of the present decline in relation to the April 21 downtrend. I discuss the question in the Elliott wave theory section, below.

[S&P 500 E-mini futures at 3:30 p.m., 75-minute bars, with volume]

What does Elliott wave theory say? Under my principal analysis, the upward correction, wave 2{-9} within wave 5{-8}, ended on April 28 at 4305.50, close to the 38.2% Fibonacci retracement level. It seems a bit short for the full correction. Nonetheless, it would break no rules, and it’s possible to see three waves internally within the rise that ended on April 28.

I had labled the decline from April 28 as wave B{-10} within wave 2{-9}. But the decline has five waves internally, and a B wave must have three waves.

I labeled the decline from April 28 as wave 1{-10} within wave 3{-9}. To make it one degree higher, it seemed to me, would make the wave disproportionate to the preceding wave 1{-9}. Generally, 3rd waves are longer than both waves 1 and 5 in a set, and it’s a firm rule that wave 3 can’t be shorter than both. So as an alternative analysis, it may be that the developing chart will require wave 1{-10} to be relabeled as wave 3{-9}, or perhaps pushed down a level to wave 1{-11}.

All of this is happening within wave 5{-7}, which began on March 29 from 4631, and wave 1{-6}, which began on January 4 from 4808.25. The two horizontal lines on the chart are the price channel for wave 1{-6}. Wave formations have a tendency to stay more or less within their price channels, but it’s not a certainty. Sometimes the price breaks free of such restraints.

We Are Here.

These are the waves currently in progress under my principal analysis. Each line on the list shows the wave number, with the subscript in curly brackets, the traditional degree name, the starting date, the starting price of the S&P 500 E-mini futures, and the direction of the wave.

  • Index:
  • 5{0} Intermediate, 12/26/2018, 2346.58 (up)
  • 4{-1} Minor, 1/4/2022 4818.62 (down)
  • 1{-2} Minute, 1/4/2022 4818.62 (down)
  • Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • Futures:
  • 1{-4} Subminuette, 1/4/2022, 4808.25 (down)
  • 1{-5} Micro, 1/4/2022, 4808.25 (down)
  • 1{-6} Submicro, 1/4/2022, 4808.25 (down)
  • 5{-7} Minuscule, 3/29/2022, 4631 (down)
  • 5{-8} Subminuscule, 4/21/2022, 4509, (down)

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it in his book Science and Sanity (1933), “The map is not the territory … The only usefulness of a map depends on similarity of structure between the empirical world and the map.” And I would add, in the ever-changing markets, we can judge that similarity of structure only after the fact.

See the menu page Analytical Methods for a rundown on where to go for information on Elliott wave analysis.

By Tim Bovee, Portland, Oregon, May 2, 2022

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
Creative Commons 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.

Earnings Plays: A Change in Method

April was the fourth month in which I focused my options trading on earnings announcements. With 49 trades on the ledger, I now have enough data to evaluate the strategy.

The methodology is a model of simplicity:

  • Pick a direction for after an earnings announcement.
  • Place the trade in the last session before the announcement.
  • Exit immediately at 25% of maximum potential profit or greater.

Apart from those simple rules, I handled the trades the way I do all options positions: Hold on to the unprofitable ones in the hope that they’ll become profitable, and manage the positions 21 days (3 weeks) before the options expire, exiting positions that are profitable but below the target, and make a decision on unprofitable positions: Sell them or hold on hoping for a reversal in those three weeks.

The Problem

And it has worked. For those 49 trades, the average return, before fees, has been 50.9%, not bad at all. That works out to a daily average return of 27.6%. It’s lower because I tended to hold the losing trades longer, under my general rules for managing positions. And indeed, when I converted the daily return to an annualized return, the difference showed, as a loss of 69.1% per day.

That loss figure is a quite fascinating. Out of 49 total trades, 40 were profitable. Nine trades pushed the results down to a considerable degree.

So what’s going on here? During the last four months my instincts told me that holding on to a losing trade generally increased the loss and led to complications, such as early assignment. And I think these numbers back that up.

Which leads to another question: What makes earnings plays different from general options trades? My theory goes like this: Most market movements are unfocused. Millions of traders all have their own different reasons for trading long or short, for choosing the trade price. As a mass they create patterns in their trades, as shown by the S&P 500 Elliott wave analysis I post each day. But their various motivations offset each other to a degree, making it more likely that today’s rise will be reversed tomorrow.

Earnings plays, however, are focused. When the price rises after earnings, the traders are motivated by the company’s announcement. Each of them has the same reason for trading as they do. That makes for bigger price movements, and greater certainty in those price movements. And so a price rise or decline will tend to be stickier than is the case with general trading. I think that makes it less likely that a losing trade will turn profitable.

That’s my idea, at least. The next question is, what to do with it?

Over the past four months, trades lasting one day have been the big winners, with a 61.9% return. The return declines to 11.0% for two-day trades, bumps up to 24.5% for three-day trades, and sinks to a sad dismal 6.9% for five-day trades. (I had no four-day trades in the sample.)

The return for positions held more than 10 days was 1.5% on average, and more than 20 days, a loss of 0.1%. The four trades kept more than 30 days produced a loss of 0.5%.

And of course those losing trades kept money tied up that could have been used for other trades.

The Solution

So, yes, the methodology I’ve used up to now has worked. But I think it can be made better. My goal will be to get out of my earnings plays quickly, win or lose. Here’s how I plan to do it.

For any position:

  • First day after entry: Exit at 25% of maximum potential profit or higher.
  • Second day: Exit at any profit, no matter how small.
  • Third day: Exit, loss or profit.

That ensures quick turnover and therefore a more efficient use of my trading funds. And so, I think it will improve the overall profit.

My plan is to use this method through July, and then assess the results.

I’ve updated my Earnings Plays rules in the Trading Rules dropdown on the menu. Here’s the new version:

Earnings Plays Trading Rules

  • Enter a position on the final trading day before the earnings announcement.
  • Select highly liquid stocks with options having an implied volatility rank of 30% or higher.
  • Select liquid monthly options.
  • Pick a direction for the expected move. There are many ways to do this. I use stock analyst opinion as tracked by Zacks Investment Research out of Chicago.
    • My method: I choose stocks with a Zacks Rank, a longer term measure, that’s 1 or 2 for a bullish trade, or 4 or 5 for bearish. A 3 rank means hold and so is neutral and I avoid it. I also use the Zacks Expected Surprise Prediction (ESP), which relies on analysts changing their evaluation shortly before earnings. It is stated as a percentage, positive for bullish and negative for bearish.  Zacks says that the tool is 70% accurate positive surprises, less for negative surprises. 
    • Other methods: Since traders bid the price of a stock up or down prior to earnings, a momentum indicator such as the RSI or MACD or Bollinger Bands can also be used as directional indicators, as can fundamental analysis or looking directly at analyst assessments
  • Directional strategies: For lower risk (and lower returns), use short bull put spreads if a rise is expected, short bear call spreads if a fall is expected. For higher risk (and higher returns), short puts if a rise is expected, short calls if a fall is expected.
  • If the stock has no clear directional bias, avoid the trade.
  • The short strikes for each strategy ideally will placed be far enough out of the money to enclose the expected move. However, I will sometimes move closer in to improve the risk/reward ratio.

The expected move is calculated by taking the value of three positions and weighting them according to their distance from the at-the-money (ATM) mark.

  1. Using the options closest to expiration…
  2. take the price of an ATM short straddle and multiply it by 60% (0.6)…
  3. take the price of strangle one strike price away from ATM, and multiply it by 30% (0.3)…
  4. and take the price of a strange two strikes away from ATM, and multiply it by 10% (0.1).
  5. The expected move is the average of the weighted prices — add them together and divide by 3.
  6. Note that the expected move doesn’t anticipate the direction of the move — could be up, could be down.

By Tim Bovee, Portland, Oregon, May 1, 202

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
Creative Commons 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.