Shares rose by 1.7% over the eight-day lifespan of the position, for a 76% annual rate. The optons position produced a -15.00% loss on debit, for a 684% annual rate.
Update 2/10/2015: PEP has risen sharply intra-day. I've opened the position after adjusting my ranges and trade. Here are the new parameters of the ranges and the trade:
Implied volatility stands at 20%, in the 76th percentile of the most recent rise.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 99.48 | 101.25 | 97.57 |
| Lower | 94.22 | 92.47 | 95.59 |
| Gain/loss | 1.8% | 3.7% |
The revision to the trade extends the profit zones to the upside and improves the probabilities.
short the $94.50 puts and long the $95.50 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money
| FEB | Strike | % |
|---|---|---|
| Upper | 101 | 84 |
| Lower | 94 | 84 |
The risk/reward ratio stands at 23:100, or about 2.3 to one.
The food and beverage company PepsiCo Inc. (PEP), headquartered in Purchase, New York, publishes earnings on Wednesday, Feb. 11, prior to the opening bell.
I shall trade the FEB series of monthly options, which trades for the last time on Feb. 20, 10 days hence.
[PEP in Wikipedia]
PEP
Volatility
Implied volatility stands at 20%, in the 81st percentile of the most recent rise.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 97.72 | 99.47 | 97.57 |
| Lower | 94.22 | 92.47 | 95.59 |
| Gain/loss | 1.8% | 3.7% |
Direction
Click on chart to enlarge.
 |
| PAP at 9:50 a.m. New York time, 30 days hourly bars |
I judge today's trend to be down because of the lack of a higher high. A move above Friday's high of $97.06 would change the trend to probably up, and above $97.27, to definitely so.
The Zacks Investment Research rating is negative but brokerage recommendations are positive, with a 57% enthusiasm rating and 71% of recommendations coming in at Strong Buy.
Three of the last four quarterly earnings announcements have produced a decline in prices, including the most recent.
The directional score, based on the chart and analyst ratings, is 1, arguing for a bull position. However, the Zacks rating and the historical response to earnings makes me doubt the bullish case.
The Trade
In order to boost returns, I've decided to use the February monthly options, expiring Feb. 21, as my vehicle.
I'll go with an iron condor, which increases reward in either direction. This structure is the best one that comes closest to meeting my needs
short the $94.50 puts and long the $95.50 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money
| FEB | Strike | % |
|---|---|---|
| Upper | 99 | 79 |
| Lower | 93 | 82 |
The risk/reward ratio stands at 6:5.
Decision for My Account
The trade as constructed puts all of the one standard deviation and chart ranges within the zone of maximum profit, and does the same with nearly all of the two standard deviation range.
The 10 days until expiration allows time for a movement beyond the zone to retrace.
I'll open this position near the closing bell, unless conditions change on the chart.
-- Tim Bovee, Portland, Oregon, Feb. 10, 2015
References
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.
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.
Alerts
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Disclaimer
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
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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