Update 4/15/2015: I closed my position in JPM. Over its two-day lifespan, shares gained 2.8%, or a 513% annual rate. My options position produced a 39.5% yield on debit, for a +7,215% annual rate.
The financial companies Wells Fargo & Co. (WFC), headquartered in San Francisco, California, and JPMorgan Chase & Co. (JPM), headquartered in New York City, publish earnings 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.
WFC
Ranges
Click on chart to enlarge.
 |
| WFC at 10:10 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 55.71 | 56.93 | 55.02 |
| Lower | 53.25 | 52.03 | 53.73 |
| Gain/loss | 2.3% | 4.5% |
The Trade
The proposed trade places all but 2 cents of the chart range to the upside in the zone of profit and all of the range to the downside. The one standard deviation range has 1 cents to the upside and 25 cents to the downside outside of the zone of profit.
short the $53.50 puts and long the $52.50 puts
sold for a credit and expiring April 18
Probability of expiring out-of-the-money
| APR | Strike | OTM |
|---|---|---|
| Upper | 55 | 63.8 |
| Lower | 53.5 | 72.8 |
The risk/reward ratio stands at 3:2. The premium is 38 cents (26 cents for the calls and 12 for the puts).
JPM
Ranges
Click on chart to enlarge.
 |
| JPM at 10:40 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 63.40 | 64.77 | 62.14 |
| Lower | 60.68 | 59.31 | 59.73 |
| Gain/loss | 2.2% | 4.4% |
The Trade
I've chosen to skew the trade toward the upside, given the bullishness of the most recent rise and the bullish assessment by analysts as reported in Zacks Investment Research.
short the $62 puts and long the $61 puts
sold for a credit and expiring April 18
Probability of expiring out-of-the-money
| APR | Strike | OTM |
|---|---|---|
| Upper | 64 | 85.2% |
| Lower | 62 | 51.0 |
The risk/reward ratio stands at 3:2. The premium is 43 cents (9 cents for the calls and 34 cents for the puts).
Decision for My Account
I've opened positions in WFC and JPM as described above.
-- Tim Bovee, Portland, Oregon, April 13, 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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