Wednesday, October 29, 2014

VALE: Volatility play

The Brazilian mining company Vale SA (VALE) publishes earnings prior to the opening bell on Thursday. [VALE on Wikipedia]

Implied volatility is lower than I like with this strategy. Also, even though VALE ranks among the 50 symbols having the greatest open interest on their Weeklys options, the distribution of interest makes it difficult to construct a viable position.


Implied volatility stands at 40% and has been falling since its 56% peak attained on Oct. 16. The problem is, volatility has fallen too far for my taste. It stands in the 47th percentile of the run-up that culminated in mid-October. For a volatility play, I prefer that volatility be in the upper half of the range, the higher the better.

This is a major strike against using VALE for this strategy.

The Trade

VALE's options have open interest in the three and four figures on the Weeklys I would want to use in a building  position. But its all concentrated in calls at six strikes and puts at five strikes.

The reason is the price. VALE shares cost $10.64 each, which is quite low for an options-bearing stock. It tends to produce a concentration of open interest, and also a rapid drop off to zero of the lower figure in the bid/ask pair.

This makes it extremely difficult to build a complex options strategy and constitutes a second major strike against VALE.

Decision for My Acounrt

A trade isn't played under baseball rules. Two strikes, in this case, means that VALE is out. I won't try to build a very short term volatility trade with low volatility and, when building a position, one hand tied behind my back. I won't be making a volatility play on VALE.

-- Tim Bovee, Portland, Oregon, Oct. 29, 2014


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".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

My method of scoring price and volatility responses to earnings, used in the "Chart" section, is the simplest imaginable. Looking at the four most recent earnings announcements, I give one point for a rising price or rising volatility in the week after the announcement, subtract a point to a falling price or volatility, and give a zero if the response is  sideways movement. I then add the four quarters together to produce separate scores for price and volatility, and then add the two to produce a combined score. 

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.

Creative Commons 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

No comments:

Post a Comment