Wednesday, April 15, 2015

NFLX, UNH Analysis

Update 4/25/2015: UNH expired without value. Shares rose by 0.2% over nine days, or a +7% annual rate. My options position produced a 100.0% yield on debit, for a +4,056% annual rate.

Update 4/23/2015: NFLX made a huge move to upside after earnings were announced and never drew back to any significant extent. I've exited the position to avoid assignment.

Shares rose by 17.2% over eight days, for a +787% annual rate. The options position produced a -126.4% loss on debit, for a -5,767% annual ratel

The steaming video entertainment company Netflix Inc. (NFLX), headquartered in Los Gatos, California, publishes earnings after the closing bell on Wednesday, and the managed health care company UnitedHealth Group Inc. (UNH), headquartered in Minnetonka, Minnesota, publishes before the opening bell on Thursday.

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.


[NFLX, UNH in Wikipedia]

NFLX

Ranges

Click on chart to enlarge.
NFLX at 10:45 a.m. New York time, 30 days hourly bars
Implied volatility stands at 54.0%, which is 4.1 times the VIX, a measure of volatility of the S&P 500 index. NFLX’s volatility stands in the 77th percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Upper512.73550.68485.00
Lower436.95398.90472.32
Gain/loss8.0%16.0%
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

Rarely have I seen such a discrepancy between a narrow chart range and a broad one standard deviation range. I'm ignoring the chart and going with the standard devation.

Iron condor short the $515 calls and long the $525 calls,
short the $435 puts and long the $425 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money

APR4StrikeOTM
Upper51576.0%
Lower43573.0

The risk/reward ratio stands at 1.3. The premium is $4.43 ($2.17 for the calls and $0.74 for the puts).

UNH

Ranges

Click on chart to enlarge.
UNH at 11:02 a.m. New York time, 30 days hourly bars
Implied volatility stands at 29.2%, which is 2.2 times the VIX, a measure of volatility of the S&P 500 index. UNH’s volatility stands in the 99th percentile of its most recent rise.

I've used the alternate resistance set April 13 for the upper boundary of the chart range

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Upper123.71128.84121.31
Lower113.45108.32114.60
Gain/loss4.3%8.7%
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

In constructing the trade, I've had to narrow the zone of profitability considerably in order to get an acceptable risk/reward ratio.

Iron condor short the $124 calls and long the $122 calls,
short the $114 puts and long the $112 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money

APR4StrikeOTM
Upper12273.8%
Lower11474.9%

The risk/reward ratio stands at 2:1. The premium is $0.66 ($0.38 for the calls and $0.28 for the puts).

Decision for My Account

I've opened positions on both symbols as described above.

-- Tim Bovee, Portland, Oregon, April 15, 2015

References

My volatility trading rules can be read here.


Alerts


Two social media feeds provide notification whenever something new is posted.

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

Creative Commons 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.

No comments:

Post a Comment