Shares gained 3.2% over seven days, for a +169% annual rate. The options position produced a 62.5% yield on debit, for a +3,259% annual rate.
The diversified industrial-scale technology conglomerate General Electric Co. (GE), headquartered in Fairfield, Connecticut, publishes earnings on Thursday prior to the opening bell, and the oilfield services company Schlumberger Ltd. (SLB), headquartered in Houston, Texas, publishes on Wednesday after the closing bell.
I shall use the APR4 series of options, which trades for the last time eight days hence, on April 24.
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.
GE
Ranges
Click on chart to enlarge.
 |
| GE at 10:40 a.m. New York time, 30 days hourly bars |
The upward gap on April 10 following announcement of a divesture of the GE Capital unit has distorted the chart's support and resistance levels, and my focus in constructing the trade will be on the one standard deviation range.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 28.12 | 28.97 | 28.80 |
| Lower | 26.40 | 25.55 | 24.76 |
| Gain/loss | 3.1% | 6.3% |
The Trade
This is an almost "by the book" construction, matching the one standard deviation range. I trimmed the zone of profit by 12 cents off the top and 10 cents off the bottom, excluding 22 cents of the one standard deviation range.
short the $26.50 puts and long the $25.50- puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money
| APR4 | Strike | OTM |
|---|---|---|
| Upper | 28 | 74.8% |
| Lower | 26.5 | 77.9% |
Even with trims and adjustments I made in setting up the proposed position, the risk/reward ratio stands at a high level, 3.7:1.
SLB
Ranges
Click on chart to enlarge.
 |
| SLB at 10:55 a.m. New York time, 180 days 4-hour bars |
The nearest support level on the chart is quite weak. However, the nearest strong support is too far away to be practical in constructing a trade. My focus will be on the one standard deviation range.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 94.33 | 98.01 | 91.99 |
| Lower | 86.97 | 83.29 | 87.76 |
| Gain/loss | 4.1% | 8.1% |
The Trade
short the $87 puts and long the $85.50 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money
| APR4 | Strike | OTM |
|---|---|---|
| Upper | 94.5 | 92.3% |
| Lower | 87 | 72.8% |
The risk/reward ratio stands at 2.3:1. The premium is $0.48 ($0.25 for the calls and $0.23 for the puts).
Decision for My Account
I'm declining to take the GE trade because of the high risk/reward ratio. I've opened a position in SLB as described above.
-- Tim Bovee, Portland, Oregon, April 16, 2015
References
My volatility trading rules can be read here.
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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