Tuesday, February 17, 2015

HUN: Volatility Play

Update 2/21/2015: HUN expired without value, providing maximum profit.

The shares declined by 7.8% over four days, or a 713% annual rate. The options position produced a 100% yield on debt, for a 9,125% annual rate.

Update 2/17/2015: I've opened an iron condor position in HUN as described in "The Trade", below. It was very difficult to get a fill at a price that provided a risk/reward ratio of 3:1 or better. All in all, my offer was on the board for nearly an hour and 45 minutes before going through. This tells me that simply in terms of liquidity, HUN is a somewhat marginal trade, despite average volume of 2.9 million shares a day. It will work out well if my short position expires out of the money, worthless, for maximum profit. It might get a bit expensive if I have to close the position early.

The Huntsman Corp. (HUN), an organic chemical company with executive offices in Salt Lake City, Utah, publishes earnings prior to the opening bell on Wednesday, Feb. 18.

HUN lacks Weeklys and I shall use the FEB series of options, which trades for the last time on Friday, Feb. 20, three days hence.

[HUN in Wikipedia]


The goal of my trade is to construct a direction-neutral position with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.


Click on chart to enlarge.
HUN at 11:10 a.m. New York time, 30 days hourly bars
HUN is in a countertrend correction to the upside in the midst of a downtrend that has been underway since November 2014. The price reversed to the downside in early trading today (marked with a yellow oval).

I'm unable to pick a direction from this chart.

Implied volatility stands at 45%, in the 68th percentile of the prior rise.

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

Lacking a clear direction, I'll attempt an iron condor. The one below covers all of the one standard deviation range -- the uncovered portion is to the upside, and nearly all of the two standard deviation range to the downside. The chart range leaves more uncovered to the downside but covers everything to the upside.

That's a convoluted way of saying that the options-implied ranges are skewed to the upside when compared to support and resistance on the chart.

Iron condor short the $25 calls and long the $27 calls,
short the $22 puts and long the $20 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money


The risk/reward ratio stands at 3:1.

Decision for My Account

The coverage is adequate for my purposes. I've put in an order for a position as described above. The premium dropped as I was entering the order. Rather than follow the market, I'll stick to my original asking price and shall update this post if I get a fill.

-- Tim Bovee, Portland, Oregon, Feb. 17, 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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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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