Tuesday, January 13, 2015

JPM Reconsidered: Volatility play

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

During the three-day lifespan of the position, shares declined by -5.1%, for an -52.1% annual rate.

The options produced a 100% yield on debit, or a 1,013.9% annual rate.

Note: Earlier in the market session I published an analysis of JPM as a volatility play keyed to the earnings announcement but rejected the trade because of ambiguity about the trend. The price has reversed to the downside, making it possible to construct a trade, and I have opened a position. Here is the revised analysis. See the original at "JPM: Volatility play".

The investment banker and financial services company JPMorgan Chase & Co. (JPM), headquartered in Midtown Manhattan in New York City, publishes earnings on Tuesday prior to the opening bell. [JPM in Wikipedia]

Two other symbols, CSX and WFC, met the liquidity requirements for consideration but failed because their implied volatility was low relative to its most recent range, below the 60th percentile.



Implied volatility stands at 28%, placing it in the 67th percentile of the rise from 23% on Dec. 26, 2014 to 31% on Jan. 6.

The one standard deviation range from the current implied volatility, encompassing 68.2% of trades, suggests a potential gain or loss of 2.6% in the next three days, until options expire, and the two standard deviation range, covering 95% of trades, of 5.1%.

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

Elliott wave analysis of the longer-term chart, on the left, shows JPM within a mature 3rd wave of a rise from October 2011. The internal count of wave 3 is poorly differentiated. However, the form of the wave suggests a slowing of the rise preparatory to a reversal. However, JPM will not have swung into a definitive downtrend until the price drops below $54.02, or arguably, the slightly earlier low of $51.44.

Click on chart to enlarge.
JPM 4 years 2-day bars (left) 90 days 4-hour bars (right)

The decline from the Jan. 9 peak of $60.79 shows  JPM traced an upward retracement from Monday into this morning that has carried the price more than 2% above the decline's low, $59.27. The retracement reversed in afternoon trading

The primary and immediate trends are both clearly down.

The Trade

Although JPM has liquid Weeklys in its options inventory, I decided to work with the monthly JAN series, which will trade for the last time on Jan. 16, three days hence. This gave me better metrics for the trade.

It is a risk in that it comes close to turning the trade into a lottery ticket. If the price moves in my favor then I win; if against, I lose, with only a very limited opportunity to mitigate the result.

Bear call spread, short the $59 calls and long the $60 calls
sold for a credit and expiring Jan. 16
Probability of expiring out-of-the-money

Decision for My Account

The risk/reward ratio is 8:5, with a 71.84% chance of expiring in the money for maximum profits. Good odds for a lottery ticket!

I have opened the position as described above.

-- Tim Bovee, Portland, Oregon, Jan. 13, 2015


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.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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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.

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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.

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