If you have not read the comments to the homework before reading this click here and read them first. This is the first part of the answer.

What a diverse number of responses! Some would buy puts, some would buy calls...some would hold over earnings, some wouldn't...some saw the set-up as an ascending triangle, some saw the set-up as a symmetrical triangle...some would buy Nov, others Jan! Look at all the different responses. Some offer pertinent analysis, such as the spin-off which created the discrepancy in the charts (nice work "smokeisms"), or other posts which offered info that was relevant to what AT had done on past announcements, but not going to help us make the trade based on today. The assignment was created to tel me what you see, and what you would do. How do you feel you did?

Great job and thanks to all that participated. I learned more about all of you by reading these. As you can see, no two traders are truly alike in how they do what they do. Do any of these different approaches tell us what the stock is going to do? No they don't, so it is important you have a good plan in place no matter what it decides to do.

Let me give you my take. Despite the spin-off that took place last month (which is not incorrect data by the way) we can clearly see a triangle break. Take a closer look...

Friday represented a confirmation of this pattern. Today you can see a trace back to old resistance as new support. Mike Z made the only comment on how he would exit if this new support level didn't hold up. Nice work Mike, I would do the same. Friday also offered the volume needed to confirm this breakout so the trade set-up is there. The triangle is three points wide, and should hit this target within six weeks. Under the usual circumstances all you would need is a Dec option with a $60 strike (if you are aggressive) or $55 strike (if you are conservative). HOWEVER...Earnings are announced on Friday. A lot of comments mentioned no trades would be placed due to this, some said they would hold over earnings based on what the company did in the past. Perhaps I need to run my post about holding over earnings again?

Could you still enter the trade and get out before earnings? Sure, if you saw something here that led you to believe the stock would hit that $3 in a week...why not? Consider your R/R though. Let's say you picked up the Nov 60's at $.80 (you would only buy the Nov since you will be in and out in a week). If you hit this target of $60 in about a week, theoretically...your options would be worth about $1.50 (give or take) thanks to the Black Scholes. Do you like this scenario?

The next questions is, what is the probability that the stock will hit this price in 4 more days? Very, very low. This is why I didn't take this trade as of Friday, even though I had it on a list for some reason. Earnings would have forced me out before I would have a chance to profit.

So the end result is, a low risk reward, a low probability, and a chart situation that threw many up in arms. In my book this made a good example to look over. I think we should do this once a week, don't you.

Good work everyone.

Posted by Option Addict on 10/23/2006 at 10:49 AM | Permalink