The oilfield services company Halliburton Co. (HAL), headquartered in Houston, Texas, and the financial services company Morgan Stanley (MS), headquartered in New York City, publish earnings on April 20 prior to the opening bell.
I shall use the APR4 series of options, which trades for the last time four days hence, on April 24.
The goal of my trades is to construct direction-neutral positions with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.
HAL
Ranges
Click on chart to enlarge.
 |
| HAL 10:02 a.m. New York time, 180 days 4-hour bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 49.98 | 51.18 | 51.13 |
| Lower | 44.88 | 42.78 | 39.27 |
| Gain/loss | 4.5% | 9.0% |
The Trade
The chart range is exceptionally wide, and I'm finding it hard to get a reasonable risk/reward ratio matching the one standard deviation range. So I've focused on the probability of expiring out of the money for maximum profit with little regard to the ranges.
short the $46 puts and long the $45 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money
| APR4 | Strike | OTM |
|---|---|---|
| Upper | 49.5 | 85.4% |
| Lower | 46 | 63.5% |
MS
Ranges
Click on chart to enlarge.
 |
| MS at 10:20 a.m. New York time, 90 days 2-hour bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 38.18 | 39.45 | 37.76 |
| Lower | 35.62 | 34.35 | 35.00 |
| Gain/loss | 3.5% | 6.9% |
The Trade
With the price declining today I've trimmed the profit zone at bit from the top in order to improve the risk/reward ratio.
short the $35 puts and long the $34 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money
| APR4 | Strike | OTM |
|---|---|---|
| Upper | 37.5 | 65.1% |
| Lower | 35 | 83.5% |
The risk/reward ratio stands at 1.9:1. The premium is $0.33 ($0.26 for the calls and $0.08 for the puts).
Decision for My Account
I've opened a position in MS as described above. I'm declining to open a positon in HAL because of the difficulty in matching the ranges with an acceptable risk/reward ratio.
-- Tim Bovee, Portland, Oregon, April 17, 2015
References
My volatility trading rules can be read here.
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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
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Based on a work at www.timbovee.com.
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