$JD stock dropped like a rock

$JD stock dropped like a rock


$JD stock is the headlines recently and not for very good reasons.  The CEO has criminal charges and the company share price is down around $20 from $45 in early-June.  Implied volatility has risen way over the level that usually accompanies the earnings cycle.  Why is that significant?

Earnings volatility is usually the highest level for a given equity over the course of the year because the chance of a move is known FOR A VERY SHORT PERIOD OF TIME.  If volatility climbs higher than that level then the market does not know the duration of the next wave of movement.  Essentially the stock is in uncharted territory as the liquidity provider struggles to price outcomes with large potential moves.  $JD is in a tailspin similar to that of $EFX of a year ago.  Bad things are happening and no one knows when they will stop.  The big difference comparing the $JD stock drop and $EFX is that $EFX was facing a business unknown with the data breach.  $JD might lose a CEO but it is not clear on how the business runs without him.  It was running pretty good with him.

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I call that setup the “story”.   And in Options Made Easy Mark and I will talk about the potential on a trade and how to pick the option.   A big part of the trade setup is creating a reasonable expectation with decent odds attached to it.  The potential move helps define the position we chose at any point in time.  The $JD CEO Issue might drag on for weeks so a direct bet on a turnaround could kill option premium in the short term.  I want to avoid that.  The massively high implied volatility makes me want to sell it although a $5-$7 move over a two week period is possible since it just did that.  The two year low for $JD is  $23 which creates a decent lower boundary.

The trade idea based on this would be $23 to $32 as a landing area in a month’s time.  Oct12 cycle straddles are around $3 which to me prices the story cheaply.  I think it is possible to buy the movement for much less than $3.  Options Made Easy is an education in picking the trade that best prices the story for least amount of risk.  That is something you can learn.

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