PM Analysis

The tobacco products company Philip Morris International Inc. (PM), headquartered in New  York City, publishes earnings on Thursday before the opening bell.

[PM in Wikipedia]

PM

Ranges

Click on chart to enlarge.

PM at 11:10 a.m. New York time, 30 days hourly bars

Implied volatility stands at 21.8%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. PM’s volatility stands in the 71st percentile of its most recent rise.

I shall use the AUG monthly series of options, which trades for the last time 37 days hence, on Aug. 21.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	88.52	94.26	83.66	89.61
Lower	77.04	71.30	80.00	75.95
Gain/loss	6.9%	13.9%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

I'm unable to provide sufficient  coverage of the maximum historical earnings move using a hedged iron condor position. So I've built using the strangle, which has no limit on the loss.

Strangle, short the $90 calls and long the $75 puts,
sold for a credit and expiring Aug. 22
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	90	96.2%
Lower	75	88.1%

The premium is $0.40. The stock at the time of analysis was priced at $82.83.

The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $6.83, and the average was $2.29.

Decision for My Account

The proposed trade has a premium that is relatively small compared to the buying power effect. A single contract takes $948 off of the buying power in return for a 40-cent premium. I don't have a guideline for that ratio, but this one feels too high for me.

For that reason, I'm passing on the trade and won't be opening a position to coincide with PM's earnings announcement.

-- Tim Bovee, Portland, Oregon, July 15, 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.