Friday, January 30, 2015

XOM: Volatility play

Update 2/4/2015: Oil prices reversed to the upside and XOM shares rose by 4.4% over the six-day lifespan of the position, for a 270% annual rate. The options produced a 238.5% loss on debit, a -14,506% annual rate.

The global oil and gas company ExxonMobil Corp. (XOM), headquartered in Irving, Texas, publishes earnings on Monday, Feb. 2, prior to the opening bell.

XOM has Weeklys among its options inventories, and I shall trade the FEB1 series of options, which trades for the last time on Feb 6, seven  days hence.

[XOM in Wikipedia]



Implied volatility stands at 29%, in the 66th percentile of the rise from 21% on Dec. 23, 2014  to 32% on Jan. 14.

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


Click on chart to enlarge.
XOM at 10:30 a.m. New York time, 30 days hourly bars
XOM has been in a downtrend since July 2014, coinciding with a collapse in petroleum values that has chopped crude prices by more than half. The decline has continued in the month leading up to the earnings announcement.

The price began to rise on Thursday and has continued its upward course into Friday.

The directional score, based on the chart and analyst ratings, is negative 4, arguing for a bear position. I shall structure my trade as a bear call spread.

The Trade

Bear call spread, short the $90 calls and long the $91 calls
sold for a credit and expiring Feb. 7
Probability of expiring out-of-the-money


The risk/reward ratio stands at 57:200, or a bit less than 3:1.

Decision for My Account

I've opened a bear position in XOM as described above. In order to get a reasonable premium, I had to leave $1.26 of the chart range outside of the zone of maximum profit at expiration, as well as $1.49 of the one standard deviation range. However, the probability of a profitable trade is high enough to theoretically mitigate the impact.

-- Tim Bovee, Portland, Oregon, Jan. 30, 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".

The directional score is calculated as the sum of the following:
  • Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
  • Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
  • Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
  • Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
  • 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
  • One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.

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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