Wednesday, December 3, 2014

PVH, DG: Volatility plays

Update 1/17/2015: My short options spreads on PVH expired out-the-money and so without value, providing maximum profit.

During the 440-day lifespan of the position, shares declined by -9.6%, for a -79.5% annual rate.

The options produced a 100% yield on debit, or an 829.6% annual rate.

Update 12/20/2014: DG expired out of the money on Dec. 20 for maximum profit, the best possible outcome for a trade of this sort.

During the 17-day lifespan of the position, shares rose by 2.1% over 17 days, or a 44.4% annual rate. The options produced a 100% return on debit, for a 2,147.1% annual rate.

Update 12/3/2014: I've opened positions in both PVH and DG as described in their respective "Trades" sections, below.

The apparel company PVH Corp. (PVH), headquartered on Madison Avenue in New York City, announces earnings after the closing bell today, Dec. 3, and the discount retailer Dollar General Corp. (DG) headquartered in Goodlettsville, Tennessee will publish earnings prior to the opening bell on Thursday, Dec. 4. [PVH, DG in Wikipedia]



Implied volatility stands at 38%, the peak of the range. There is at present no downward hook to path traced by volatility.

The one standard deviation range of confidence, encompassing 68.2% of trades over the next week, imply a potential gain or loss of 5.3%, and the two standard deviation range, enclosing 95% of trades, a gain or loss of 10.6%.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

PVH's chart shows the price having been in a downtrend since Nov. 28 within a sideways movement that shows a slight downward bias. Forced to pick a direction, I'll say bearish, but without much conviction.

Click on chart to enlarge.
PVH 90 days 2-hour bars
PVH has no Weeklys in its options inventory The best I can do with a bear play expiring in January covers me to the bull side up to $130 plus premium received. The position, described below,  protects all of the one standard deviation range but leaves 14% of the two standard deviation range uncovered.

The risk/reward ratio is 3.3:1.

Bear call spread, short the $130 calls and long the $135 calls
Sold for a credit and expiring Jan. 15
Probability of expiring out-of-the-money


I checked out a similar trade expiring Dec. 19. The risk/reward ratio is 5.3:1, higher than I like, although the probability of expiring out of the money for maximum profit is a bit higher.

The premium is a lower than with the January expiration, is is to be expected, and so with the December expiration the uncovered portion of the two standard deviation range is 15%

Bear call spread, short the $130 calls and long the $135 calls, sold for a credit
and expiring Dec. 19 
Probability of expiring out-of-the-money




Implied volatility stands at 46%, in the 97th percentile of range defined by the rise that ended Nov. 25 at 47%.

The one standard deviation range, enclosing 68.2% of trades, implies a potential gain or loss of 6.4% over the next week, and the two standard deviation range, encompassing 95% of trades, implies an 11.6% gain or loss.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

The chart shows DG to be in an uptrend, although it is close to resistance, increasing the chances of a reversal if that resistance holds. It calls for a bull play with an emphasis on downside protection.

Click on chart to enlarge.
DG 90 days 2-hour bars
DG has Weeklys in its options inventory, and at this point I'm looking at those expiring on Dec. 12 -- the DEC2 series.

However, there are no DEC2 options with open interest in the three figures or greater, running up against my strong reluctance to attempt illiquid trades.

Even the month options, expiring Dec. 19 -- the DEC series -- is a poor vehicle for constructing a trade. There are strike prices running up to the four figures, but they are spottily arranged and impose huge constraints.

Bull put spread, short the $65 puts and long the $62.50 puts
Sold for a credit and expiring Dec. 19
Probability of expiring out-of-the-money


The spread between the short and long legs is entirely dictated by the distribution of open interest. The risk/reward ratio is 1.9:1.

This structure leaves uncovered 39% of the distance between upside and downside resistance on the chart.

Decisions for My Account

For PVH, the higher risk on the December trade lowers my potential profit to the point where it's not worth the effort. The January trade provides sufficient return with lower risk, although also slightly lower odds. I shall take the January trade.

DG is a lower probability trade. However, I shall know immediately after the earnings announcement whether the price has responded in a direction favorable to my position. if it moves against me, then I can get out quickly, minimizing my losses. I intend to take the DG trade, as well.

-- Tim Bovee, Portland, Oregon, Dec. 3, 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