MON Analysis

Update 6/9/2016: The chance for a big profit on MON disappeared in mid-May with the announcement that the German multinational Bayer AG was in negotiations for a possible purchase of Monsanto Co. Shares gapped up at the opening by 6.8%. 

Even earlier rumors were flying Two trading days before the announcement the price had gapped up 5.4%, and five trading days before that, 11.1%. 

So the only question I faced with MON was whether to take a large loss or wait in hopes of a small profit. I bided my time and today cashed out.

Of course the beauty of trading options is that even a small profit gives a rate of return that stock traders and fixed-income investors can only envy.

Shares rose by 10.1% over 27 days, or a +136% annual rate. The options position produced a 4.0% yield on debit for a +54% annual rate.

I exited at 4% of my potential maximum profit -- my goal is always 50% or better. The odds of expiring out of the money for maximum profit were 57.6%, high enough that I could have justified waiting further if I had wanted. I chose to play it safe.

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The agricultural products company Monsanto Co. (MON), a leader in genetically modified foods headquartered in St. Louis, Missouri, closed above its 20-day price channel on Thursday, sending a bear signal. The stock price has low historical odds that it will follow through on a trading signal, making prone to whipsaws.

[MON in Wikipedia]

MON

I shall use the JUN series of options, which trades for the last time 35 days hence, on June 18.

Ranges

Implied volatility stands at 38%, which is 2.6 times the VIX, a measure of volatility of the S&P 500 index. MON’s volatility stands in the 75th percentile of its most recent range. The price used for analysis was $98.31.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	109.95	121.60	N/A
Lower	86.67	75.02	N/A
Gain/loss	±$11.64	±$23.29	N/A

Implied volatility 1 and 2 standard deviations; central tendency earns move

Grit: The Power of Passion and Perseverance by Angela Duckworth

The Trade

MON fell sharply from May to September 2015, retraced about 40% of the decline in a rise into December 2015, and then fell into a sideways movement that continued until May 11, when it gapped upward on talk of a beside take-over bid by Bayer AG. Bloomberg News reported on the news here.

I'm comfortable with a sideways play, even if the breakout was based on news, for these reasons: 1) This is a huge merger and it will take time for the regulators to come to a decision; 2) It's still in the rumor stage.

MON has given four bull signals in the past year. All were failures, on average losing 2.8% over 24 days. Under my rules low odds of success require a direction neutral play a strategy that, given the uncertainty of MON's future, will cover both positive and negative developments.

Today's brokerage assessment gives a neutral enthusiasm score to MON, falling precisely at zero percent. Half of 14 analysts following the stock have issued strong buy recommendations.

Iron condor, short the $110 calls and long the $115 calls,
short the $90 puts and long the $85 puts,
sold for a credit and expiring June 19.
Probability of expiring out-of-the-money

JUN	Strike	OTM
Upper	110	83.3%
Lower	90	77.1%

The premium is $1.30, which is 26% of the width of the position’s wings. The stock at the time of entry was priced at $98.69.

The risk/reward ratio is 3:1.

The zone of profit in the proposed trade covers a $12.50 move either way.

In constructing the trade, I skewed the one of profit to the upside, allowing for better odds in the direction of the most recent movement.

Decision for My Account

I've opened a position on MON as described above.

-- Tim Bovee, Portland, Oregon, May 13, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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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.