SPY Analysis


Update Sept. 20, 2017: I exited the October position entered on Sept. 11 and rolled forward to a similar position expiring Nov. 17, or 58 days from now.

I exited the October position at a 35 cent debit with the share price at $250.01. The debit produced an exit at 36.4% of maximum potential profit; my goal was 50%.\

By my Elliott wave count SPY began a micro-level 4th wave correction, taking a rapid fall after today’s Federal Open Market Committee statement, The wave by the rule of alternation ought to trend sideways, so I chose to roll forward immediately rather than taking time before re-entering. The goal remains to ride SPY up toward the end of the 5th wave that began in August.

Here is the analysis of the new November position:

Premium: $0.51 Expire OTM  
SPY-vertical Strike Odds Delta
Long 249.00 50.7% 0.48
Break-even 247.51    
Short 247.00 63.2% 0.35

The premium is 26% of the width of the position’s wings.

The risk/reward ratio is 2.9:1.

I re-entered  SPY as described above. The stock at the time of entry was priced at $249.68.

SPY gapped up today in a move that I interpret, using Elliott wave analysis, as being the start of a 5th wave rise from the low set March 27.

The price has just exceeded that of Aug. 8. The amount of additional rise is uncertain; under Elliott wave theory it could be done now, or it could have a  very large distance to go. That being the case, I shall use a tight hedge to limit my losses.

I shall use options that trade for the last time 39 days hence, on Oct. 20.

Implied volatility stands at 10%, which is identical to the VIX, a measure of the volatility of the S&P 500 index.

SPY’s IV stands in the 6th percentile of its annual range and the 11th percentile of its most recent broad movement. In other words, it is very, very low, making this an unusual short play. However, looking at the most recent movement differently, I get the 46th percentile. SPY’s volatility has been meandering in a narrow channel for much a year, so it is hard to distinguish clear turning points.

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Live: Monday, Sept. 11, 2017

9/11 – 3:25 p.m. New York time

I made one trade today, entering a position on SPY based on Elliott wave theory. This week there are no earnings plays that qualify for further analysis, so I am looking elsewhere for trades.

It has been awhile since I have traded based on Elliott wave theory, although I use it all the time in deciding when I should exit. Elliott wave analysis tracks patterns in price movements. Here are some places to go for more information:

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Live: Friday, Sept. 8, 2017

9/8 – 3:15 p.m. New York time

One trade today: I exited KR for a profit. In terms of evaluating the analysis, the net step is to see what happens to the price on Monday. KR on the second trading day after the four previous earnings announcements showed large moves. I exited early and under target to avoid such a move. I’m interested to see if in fact a large Day 2 move happens for a fifth time.

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PAY Analysis

VeriFone Systems Inc. (PAY)

PAY publishes earnings on Thursday after the closing bell.

I shall use options that trade for the last time eight days hence, on Sept. 15.

Implied volatility stands at 48%, which is 4.1 times the VIX, a measure of the volatility of the S&P 500 index.

PAY’s IV stands in the 62nd percentile of its annual range and at the peak percentile of its most recent broad movement.

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KR Analysis

The Kroger Co. (KR)

Update 9/8/2017: KR came in 1 cent higher that the Street’s consensus earnings estimate, consistent with the small earnings surprise predictor score of 0.96 from Zacks Investment Research.

Shares fell $1.42 at the open, remaining within the profit zone and consistent with the low beta. In my preliminary analysis I noted that KR tended to see large moves on the second trading day after earnings were published. Rather than risk a loss, I exited at 14.7% of maximum potential profit, below my target of 25%.

The price move was within the bounds observed after the last four earnings announcements, including the $1.23 central tendency move, the narrowest of the metrics.

The price fall, despite the positive earnings surprise, coincided with Zacks’ negative view; the Zacks score is a bearish 4.

For the one-day holding period of my position, shares fell by 4.9%, or a -1,801% annual rate. Tye options position produced a 17.2% return for a +6,293% annual rate.

KR publishes earnings on Friday before the opening bell.

I shall use options that trade for the last time eight days hence, on Sept. 15.

Implied volatility stands at 45%, which is 3.8 times the VIX, a measure of the volatility of the S&P 500 index.

KR’s IV stands at the peak percentile of both its annual range and its most recent broad movement.

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Live: Wednesday, Sept. 6, 2017

9/6 – 3:10 p.m. New York time

As I anticipated last night, none of the possibleearnings plays that turned up under my preliminary screening are worth a full analysis, and I found nothing else worth trading.

The two possibilities — I won’t dignify them as prospects — are HDS and HPE.

Both have grids that center poorly around the at-the-money point, making it difficult to use my preferred iron fly tactic, and both have betas noticeably in excess of the S&P 500. In addition, HDS has  high earnings surprise predictor score from Zacks Investment Research. All in all, both look to have a somewhat high likelihood of ending with a loss.

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Live: Tuesday, Sept. 5, 2017

9/5 – 7:45 a.m. New York time

I’m passing on both of my potential trades today without further analysis.

HDS fails to qualify because of a significant chance of a downside earnings surprise (score -1.25 on the Zacks Investment Research earnings surprise predictor) and a beta of 1.4. I prefer to have both within a -1 to 1 range.

HPE fails primarily because of its grid, which is too widely spaced spaced to allow me to construct a proper iron fly position. The deltas on the calls surrounding the at-the-money point are 55 and 25 — a huge gap. Although HPE’s earnings surprise predictor score of -0.87 meets my standards, it’s beta of 2.71 is way too high for me to consider.

Bottom line: No trades today, leaving me free to contemplate the ash falling on my beautiful city of Portland from forest fires in the Columbia River Gorge. Honestly, I’d rather be trading.

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The Week Ahead: Short week, global trade, Beige Book, Fedsters swarm

A shortened week after a major holiday which is also the week after the employment report. Econ reporting doesn’t get much more inactive than that.

U.S. markets will be closed on Monday for the Labor Day holiday. The other global hubs — London, Tokyo and Sydney — will be open as usual.

One major report is scheduled for the week: International trade on Wednesday at 8:30 a.m. New York time.

And as though to make up for the reporting doldrums, the Federal Reserve releases its “Beige Book”, a description of economic conditions in each of the agency’s districts, on Wednesday at 2 p.m., while aswarm of the Fed glitterati provide commentary on  the state of the nation.


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