Tim Bovee, Private Trader: KMI, JNJ Analysis

Monday, April 13, 2015

KMI, JNJ Analysis

The fossil fuel pipeline company Kinder Morgan Inc. (KMI), headquartered in Houston, Texas, publishes earnings on Monday after the closing bell, and the health-care products company Johnson & Johnson (JNJ), headquartered in New Brunswick, New Jersey, publishes on Tuesday prior to the opening bell.

The current options series is the regular monthly issue, which trades for the last time four days hence, on April 17.

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.

[KMI, JNJ in Wikipedia]

KMI

Ranges

Click on chart to enlarge.

KMI at 9:52 a.m. New York time, 90 days 2-hour bars

Implied volatility stands at 19.4%, which is 1.5 times the VIX, a measure of volatility of the S&P 500 index. KMI’s volatility stands in the 39th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	43.73	44.60	43.18
Lower	41.79	41.12	41.10
Gain/loss	2.0%	4.1%

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

The best position I can construct puts all of the chart range to the upside within the zone of profit but leaves a portion of that range uncovered to the downside. The one standard deviation range is uncovered at both extremes.
Iron condor short the $43.50 calls and long the $44.50 calls,
short the $42 puts and long the $41 puts
sold for a credit and expiring April 18
Probability of expiring out-of-the-money

APR	Strike	OTM
Upper	43.50	72.1%
Lower	42	81.7%

The risk/reward ratio stands at 5:1, which is on the high side.

JNJ

Ranges

Click on chart to enlarge.

JNJ at 10:03 a.m. New York time, 30 days hourly bars

Implied volatility stands at 17.7%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. JNJ’s volatility stands in the 45th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	103.51	105.39	103.37
Lower	99.73	97.85	99.60
Gain/loss	1.8%	3.7%

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

The trade below is the best I can build that covers all of the chart range. It also covers the one standard deviation range.

Iron condor short the $104 calls and long the $105 calls,
short the $99 puts and long the $98 puts
sold for a credit and expiring April 18
Probability of expiring out-of-the-money

APR	Strike	OTM
Upper	104	81.3%
Lower	99	79.9%

The risk/reward ratio stands at 5:2, a high level for iron condors.

Decision for My Account

I'm passing on both KMI and JNJ because of the inability to covers all of the chart or one standard deviation range of each with an acceptably low risk/reward ratio

-- Tim Bovee, Portland, Oregon, April 13, 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.