Tim Bovee, Private Trader: C and JPM: Volatility plays

Monday, October 13, 2014

C and JPM: Volatility plays

Update 10/17/2014: My bear position in C has expired out-of-the-money. It was a short options spread, sold for a credit, and I get to keep all of the proceeds.

The stock declined by 0.4% during the four-day lifespan of the position, or 36.3% annulized.

The options spreads produced a 99.9% yield on debit, or 9,119.3% annualized.

Update 10/13/2014: I've opened a bear call spread on C as a volatility play keyed to earnings, structuring it as described below.

Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) announce earnings before the opening bell on Tuesday, Oct. 14. I'm considering them for very short term volatility plays.

Both have highly liquid options with high open interest and narrow bid/ask spreads.

Looking first at C:

Implied volatility stands in the 97th percentile of its one-year range and today dropped off bit from the high for the year.

Implied volatility has dropped immediately after three of the last four earnings announcements. The one announcement that produced a rise in volatility came when implied volatility was extremely low, in the 6th percentile of the present one-year range.

The price has been falling since Sept. 18.

Analysts forecast earnings 12% above the year-ago quarter and nearly 40 times the prior quarter's results.

I would structure the trade as bear call options spreads, short the $52 calls and long the $53 calls, sold for a credit and expiring Oct. 17. The position has 11:1 leverage. The short options have a 72% chance of expiring out of the money.

Look next at JPM:

Implied volatility stands in the 97th percentile of its one-year range and is down very slightly from Friday's peak.

Implied volatility has fallen initially after two of the last three earnings announcements. In one instance, the brief decline was followed by a strong rise. In all three quarters volatility was near or below the midpoint of the one-year range.

The price has been falling since Sept. 19.

JPM produced a loss a year ago. Analysts are predicting that this quarters report will report earnings in line with other recent quarters, although down nearly 2% from the previous quarter.

I would structure the trade as a bear call options spread, short the $60 calls and long the $61 calls, sold for credit and expiring Oct. 17. The position has 21:1 leverage. The options have a 68% chance of expiring out of the money.

Decision for My Account

Either of these would make a decent speculation. I like the historical record for C better than JPM. C has been more consistent in its post-earnings volatility declines. C is also showing a stronger downward hook in volatility today.

I'll focus my attentions on C. If the downward hook in volatility stays in place or strengthens, then I'll open a bear position.

By Tim Bovee, Oct. 13, 2014, Portland, Oregon

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

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.