Implied volatility is in the 72rd percentile of the rise from 20% on Nov. 13 to 33% on Dec. 16. It is the second time volatility has tested the low 30s as it traces a sideways trend that began August 22.
Typically in this period of market history, volatility has traced a rise from August into November, followed by a short fall off. That pattern means that the rise to the peak carried volatility quite an impressive distance with true upside momentum..
Click on chart to enlarge.
|WAG 6 months daily bars, with implied volatility|
It is a conflict of form over substance. Formally, 72nd percentile is correct. Substantially, maybe not.
The one standard deviation range, encompassing 68.2% of trades, suggests a potential gain or loss of 5.1% in the 11 days until the options I'm considering expire. The two standard deviation range, covering 95% of trades, implies a 10.1% potential gain or loss
|Week||SD1 68.2%||SD2 95%||Chart|
The low on the chart range was attained during a sideways corruption on Dec. 9, and the high was marked on Dec. 12. A move above that high would imply a resumption of the uptrend. A decline below the low end of the range would suggest continuation of the downtrend.
It is impossible from this chart for me to decide a direction for the trade.
Click on chart to enlarge.
|WAG 15 days 15-minute bars|
There is simply no way to choose among the two directions.
At this point, I need go no further in my analysis.
Decision for My Account
The traditional solution when faced with a non-directional chart is an iron condor, which can profit whether the price goes up or down. However, I'm not a fan of that construction. Along with the possibility of bidirectional profit comes the chance for bidirectional lost. A vertical spread as a profit cliff in only one direction. An iron condor has a cliff on either side.
So instead I shall take the safest possible course: I'm passing on the trade and won't be opening a position today u WAG.
-- Tim Bovee, Portland, Oregon, Dec. 22, 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
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Based on a work at www.timbovee.com.