M Analysis

The department store chain Macy's Inc. (M), headquartered in Cincinnati, Ohio, publishes earnings on Wednesday prior to the opening bell.

I shall use the regular monthly MAY series of options, which trades for the last time three days hence, on May 15.

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.

[M in Wikipedia]

M

Ranges

Click on chart to enlarge.

M at 10:05 a.m. New York time, 30 days hourly bars

Implied volatility stands at 27.8%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. M’s volatility stands in the 74th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	66.92	68.57	67.87
Lower	63.62	61.97	63.54
Gain/loss	2.5%	5.1%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

The big challenge of constructing a position for M is the $2.50 gap between strike prices. Covering the one standard deviation range produces an overly high risk reward ratio. Lowering the risk produces an abysmally narrow profit range. Here's the best I can do to provide an adequate profit range:

Iron condor short the $67.50 calls and long the $70 calls,
short the $62.50 puts and long the $60 puts
sold for a credit and expiring May 16
Probability of expiring out-of-the-money

MAY	Strike	OTM
Upper	67.50	77.5%
Lower	62.50	75.3%

The risk/reward ratio stands at 2.8:1.

The next best structure would involve lowering the upper short strike down to $65, which is 20 cents or so below the preset rice, or raising the lower short strike to $65, only 20 cents below the present price.

Decision for My Account

I'm passing on M because the nature of the options grid won't allow me to build an iron condor that provides an adequately wide profit zone with an acceptably low risk/reward ratio. No trade.

-- Tim Bovee, Portland, Oregon, May 12, 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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.