AMGN, YUM, VMW Analysis

Update 4/23/2015: YUM rose beyond the profit zone after publishing earnings and I quickly cut my losses. Shares rose by 4.1% over two days or a +748% annual rate. The options position produced a -18.9% loss on debit, for a -3,452.7% annual rate.

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Update 4/22/2015: I exited VMW after one day, as shared rose by 8.0%, or a +2,911% annual rate. My options position produced a -143.8% loss on debit, for a -52,469% annual rate.
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I shall use the MAY1 series of options, which trades for the last time 10 days hence, on May 1, or the APR4 series, which ends trading three days from now, on April 24, .

The biotechnology company Amgen Inc. (AMGN), headquartered in Thousand Oaks, California; the fast-food restauranteur YUM! Brands Inc. (YUM), which operates such well known chains as KFC, Pizza Hut, Taco Bell and Yum! Restaurants from its Louisville, Kentucky headquarters; and the designer of virtualization software VMware Inc. (VMW), headquartered in Palo Alto, California, publish earnings after the closing bell on Tuesday.

The goal of my trades is to construct direction-neutral positions 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.

[AMGN, YUM, VMW in Wikipedia]

AMGN

Ranges

Click on chart to enlarge.

AMGN at 11:20 a.m. New York time, 30 days hourly bars

Implied volatility stands at 26.6%, which is 2 times the VIX, a measure of volatility of the S&P 500 index. AMGN’s volatility stands in the 47th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	175.57	182.96	167.62
Lower	160.79	153.40	161.72
Gain/loss	4.4%	8.8%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

In order to come close to cover ingthe chart and one standard deviation ranges, I had to go further out to the 80s on my probability of expiring out of the money for maximum profit. The result is a high risk/reward ratio.

Iron condor short the $175 calls and long the $177.5 calls,
short the $160 puts and long the $157.5 puts
sold for a credit and expiring May 2
Probability of expiring out-of-the-money

MAY1	Strike	OTM
Upper	175	81.0%
Lower	160	82.2%

The risk/reward ratio stands at 2.6:1.

YUM

Ranges

Click on chart to enlarge.

YUM at 11:32 a.m. New York time, 90 days 2-hour bars

Implied volatility stands at 30.8%, which is 2.4 times the VIX, a measure of volatility of the S&P 500 index. YUM’s volatility stands in the 100th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	84.81	88.71	82.47
Lower	76.41	72.31	76.40
Gain/loss	5.1%	10.2%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

Iron condor short the $84 calls and long the $85 calls,
short the $76 puts and long the $75 puts
sold for a credit and expiring May 2
Probability of expiring out-of-the-money

MAY1	Strike	OTM
Upper	84	75.4%
Lower	76	78.4%

The risk/reward ratio stands at 1.6:1. The premium is $0.37 ($0.19 for calls and $0.18 for puts), with the stock selling for $80.49.

VMW

Ranges

Click on chart to enlarge.

VMW at 11:55 a.m. New York time, 30 days hourly bars

Implied volatility stands at 35.1%, which is 2.7 times the VIX, a measure of volatility of the S&P 500 index. VMW’s volatility stands in the 81st percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	87.20	89.89	86.19
Lower	81.82	79.13	83.66
Gain/loss	3.2%	6.4%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

I structured the proposed trade cover the one standard deviation range, which is significantly wider than the chart range.

Iron condor short the $90 calls and long the $91 calls,
short the $80 puts and long the $79 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money

APR4	Strike	OTM
Upper	90	78.0%
Lower	80	73.8%

The risk/reward ratio stands at 1.5:1. The premium is $0.30 ($0.12 for the calls and $0.20 for the puts)selling for $84.54.

Decision for My Account

I opened positons in YUM and VMW as described above but passed on AMGN because of difficulty in obtaining a risk/reward ratio I liked.

-- Tim Bovee, Portland, Oregon, April 21, 2015

References

My volatility trading rules can be read here.


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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.