Tim Bovee, Private Trader: VZ, IBM, DD Analysis

Update 4/23/2015: I closed out IBM and VZ as they neared expiration and pushed to the edge of the profit zone.

IBM shares rose by 3.2% over the three days since I opened the position, or a +392% annual rate. my options produced a 39.4% yield on debit, for a +2,396% annual rate.

VZ shares gained 1.6% over three days, or a 194% annual rate. The options position produced a 21.2% loss on debit, for a -21% annual rate.

Update 4/22/2015: I exited DD, with shares having declined by 2.9% over two days, or a -529% annual rate. My options position produced a -55.8% loss on debit, for a -10,186% annual rate.

The computer technology company International Business Machines Corp. (IBM), headquartered in Armonk, New York, publishes earnings on Monday after the closing bell, and the telecommunications company Verizon Communications Inc. (VZ), headquartered in New York City, and the chemical company E.I. du Pont de Nemours and Co. (DD), headquartered in Wilmington, Delaware, publish prior to the opening bell on Tuesday.

I shall use the MAY1 series of options, which trades for the last time 11 days hence, on May 1, or the APR4 series, which ends trading four days from now, 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.

[VZ, IBM, DD in Wikipedia]

VZ

Ranges

Click on chart to enlarge.

VZ at 10:37 a.m. New York time, 30 days hourly bars

Implied volatility stands at 15.7%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. VZ’s volatility stands in the 31st percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	50.66	52.00	49.82
Lower	47.97	46.63	48.70
Gain/loss	2.7%	5.5%

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

The proposed trade covers the chart range with the zone of profit but leaves a portion of the top of the one standard deviation range outside of the zone.

Iron condor short the $50 calls and long the $51 calls,
short the $48.50 puts and long the $47.50 puts
sold for a credit and expiring May 2
Probability of expiring out-of-the-money

MAY1	Strike	OTM
Upper	50	70.2%
Lower	48.5	69.7%

The risk/reward ratio stands at 1.9:1. The premium is $0.33 ($0.17 on the calls and $0.16 on the puts).

IBM

Ranges

Click on chart to enlarge.

IBM at 10:35 a.m. New York time, 30 days hourly bars

Implied volatility stands at 25.6%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. IBM’s volatility stands in the 86th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	168.56	172.96	165.54
Lower	159.78	155.38	160.03
Gain/loss	2.7%	5.4%

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

Iron condor short the $170 calls and long the $172.5 calls,
short the $160 puts and long the $157.5 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money

APR4	Strike	OTM
Upper	170	76.3%
Lower	160	71.6%

The risk/reward ratio stands at 1.5:1. The premium is $0.98 ($0.49 each for the calls and puts).

DD

Ranges

Click on chart to enlarge.

DD at 10:55 a.m. New York time, 30 days hourly bars

Implied volatility stands at 21.9%, which is 1.6 times the VIX, a measure of volatility of the S&P 500 index. DD’s volatility stands in the 54th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	74.29	75.95	72.86
Lower	70.95	60.29	71.23
Gain/loss	2.3%	4.6%

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

The chart range is significantly narrower than the one standard deviation range. In order to get a reasonable probability of expiring out of the money for maximum profit, I've chosen to cover the chart range while leaving portions of the one standard deviation range outside of the profit zone.

Iron condor short the $73.50 calls and long the $74.50 calls,
short the $71 puts and long the $70 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money

APR4	Strike	OTM
Upper	73.5	71.5%
Lower	71	79.1%

The risk/reward ratio stands at 1.2:1. The premium is $0.43 ($0.22 on the calls and $0.21 on the puts).

Decision for My Account

I've opened positions on VZ, IBM and DD as described above.

-- Tim Bovee, Portland, Oregon, April 20, 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.