During the 32-day lifespan of the position, shares rose by 2.2%, for a 25.4% annual rate.
The options produced a 100% yield on debit, or a 1,140.6% annual rate.
The electronic payments company VeriFone Systems Inc. (PAY) headquartered in San Jose, California, publishes earnings after the closing bell on Monday, Dec. 15. High liquid options and implied volatility make it a candidate for a very short-term play. [PAY in Wikipedia]
PAY's implied volatility stands at 39%, at the highest point of its rise that began Oct. 27 from 37%.
|Week||SD1 68.2%||SD2 95%||Chart|
The one standard deviation range of volatility, encompassing 68.2% of trades over the next week, carries a potential gain or loss of 6.7% over the next week, and the two standard deviation range, enclosing 95% of trades, carries a potential gain or loss of 13.5%.
Click on chart to enlarge.
|PAY 180 days 4-hour bars (left), 2 days 5-minute bars (right|
The downtrend argues for a bear calls spread as my strategy.
The grid lacks Weeklys in its options inventory, so the nearest trading opportunity is the regular JAN series, which expires Jan. 15, 32 days away. My preference is for shorter time periods, ideally about 14 calendar days.
On the other hand, the grid is it liquid, as is less often the case with Weeklys.
Thhe greater time risk creates pricing that allowed me to cover the two standard deviation range, encompassing 95% of trades, for a reasonable risk/reward ratio. However, I couldn't get a fill. The position was short the $38 call, and the risk/reward ratio was 4:1.
I then dropped back to Plan B which covers one standard deviation.
The risk/reward ratio is 3.5:1. The position is profitable up to $36.43, which covers behind the one standard deviation range but leaves portions of SD2 and the chart range uncovered.
Decision for My Account
I've taken the trade, structuring it s described above. It wasn't entirely an easy fill, requiring me to lower my ask twice, by 3 cents total.
-- Tim Bovee, Portland, Oregon, Dec. 15, 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".
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.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.