Wednesday, February 18, 2015

WMT: Volatility play

Update 2/28/2015: My options position expired out of the money for maximum profit. Shares declined by 1.9% over the 10-day lifespan of the position, or a 70% annual rate. My options position produced a 100% yield on debit, for a 3,650% annual rate.

The big-box discount retailer Wal-Mart Stores Inc. (WMT), headquartered in Bentonville, Arkansas, publishes earnings on Thursday, Feb. 19, prior to the opening bell.

The stock has Weeklys among its options inventories, and I shall use the FEB4 series of options, which trades for the last time on Feb. 27, nine days hence.

[WMT in Wikipedia]


Analyst opinion and the chart give WMT a slightly bearish score, -0.4 on my scale running from -1 to +1. Over the past year earnings announcements have split evenly, two producing higher prices five days after publication and two lower prices.

WMT @11:10 a.m. New York time, 30 days hourly bars
So 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.

Implied volatility stands at 21%, in the 73rd 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

Iron condor short the $88 calls and long the $90 calls,
short the $83 puts and long the $81 puts
sold for a credit and expiring Feb. 28
Probability of expiring out-of-the-money


The risk/reward ratio stands at 3:1.

Decision for My Account

I've opened on iron condor on WMT as described above.

-- Tim Bovee, Portland, Oregon, Feb. 18, 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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