A Trader’s Q&A and a Glimpse of New Illuminati Tools

Hello everyone. An Inner Circle member asked me a question about the stock OEH recently and I wanted to share my thoughts with everyone. Notice I’m not giving any advice on the trade here whatsoever, I’m merely giving my observations of what I’m seeing.

Into the fall (autumn) we’re looking to producelive webinars so I’ll be answering more of these questions in that typeof forum.  We’ll also record them so you can view them later. 

So, our Inner Circle member saw OEH on the TradeFinder and considered that it:

1. Was forming a flag type of pattern

2. Has earnings on 4th August
3. Has September options available but slightly pricey at around 20+% of the stock price.

Here’s the chart:

OEH Chart.png

For me, this one is pretty much out of bear flag territory now, so doesn’t really count as a bear flag any more.

This stock has fallen because of anannouncement it made on Friday 4th July (maybe trying to hide the badnews on American Independence Day!) … see the stock action since then …it’s dropped from $42 ish to $28 ish in only 6 traded days! 

 Headline.png

It has since retraced upwards with fallingvolume, and therefore there is potential for another fall.  However,it’s more difficult to trade than the pretty kind of neat flags that Itrade. 

This was spotted as a steeply retracing bearflag, but in the last couple of bars it was almost forming a mini bullflag as part of the retracement.  One potentially aggressive strategycould be to trade it (short) as it falls below the bottom of this minibull flag it formed.  In other words below the 18th July bar low whichwas at $31.32.  It’s a possibility to enter a sell stop limit belowthat area and see how it goes, with a protective buy stop above thelatest high. 

You also need to pay attention to earnings … it’s on 4 August with the earnings call is on 5th August. 

Now let’s see if the options represent decent value …

Option Chain.png

Now, looking atthe option premiums for the September 35 strikes – that’s less than 2months away and the cost is around $6.30 on a $35 stock.  That’s 18%,which is a bit pricey for less than two months to go.  The actual AskPrice on these were higher but Yahoo doesn’t display the Bid-Ask out ofhours. 

Next, let’s look at a new function that you’llbe able to use soon … the implied volatility chart and filter.  Thevisuals will be tidied shortly, but you can clearly see how impliedvolatility has risen from below 50% to over 70% for the 1-monthoptions, and still too much for the 2-4 month options.  

Implied Volatility Chart.png

We want to AVOID straddles where the impliedvolatility is ramping up right before earnings.  This filter andability to look at the implied volatility charts will be a fantasticnew addition and will take you only seconds to use. 

 

Finally let’s look at another indicator. 

You should notice that the ATM open interest is 192 for the calls and 3,863for the puts.  Typically the ATM options will have greater openinterest for the calls, or they’ll be roughly even.  Here, it’smassively weighted for puts, suggesting that there’s a lot of negativesentiment out there with this stock.  Combine that with a neat bearflag and we have a good chance of a nice bearish trade, provided you doit as the stock breaks – don’t go too early. 

But there is no bear flag here any more per se, is there – it’s retraced upwards too deep for that. 

You’d normally expect the nearest themoney strike and the higher strikes to be weighted in favour of callopen interest, and the lower strikes to be more balanced or slightly infavour of put open interest.  This is all because of traders hedgingwith Out-of-the-Money options.

So … there you have it … my short analysis onOEH … looks too pricey as a straddle and the flag that has been foundis no longer a flag for me. 

Also, it has earnings around the corner andyou’d be taking a big chance if you trade it directionally beforethen.  That said, the main news has been out since 4th July and it’sunlikely to produce a major surprise at earnings. 

Hope this helps

All the best

Guy

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