The world's largest and sixth largest oil and gas companies, Exxon Mobil Corp. (XOM), headquartered in Irving, Texas, and ConocoPhillips (COP), headquartered in Houston, Texas, publish earnings Thursday prior to the opening bell.
I shall use the MAY2 series of options, which trades for the last time nine days hence, on May 8
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.
XOM
Ranges
Click on chart to enlarge.
 |
| XOM at 10:02 a.m. New York time, 90 days 2-hour bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 90.10 | 92.86 | 88.53 |
| Lower | 84.85 | 92.18 | 82.68 |
| Gain/loss | 3.1% | 6.1% |
The Trade
XOM has a relatively low implied volatility. In order to get a reasonably acceptable risk reward ratio, I've placed all but 10 cents of the upper boundary of the one standard deviation range within the profit zone but left more than 50 cents of the lower boundary outside the zone.
The most recent movement on the chart is a still-ongoing almost-symmetrical triangle, beginning April 16, which I interpret as a continuation pattern within an uptrend beginning March 13.
I've accepted a slightly high risk/reward ratio in return for a significantly higher premium as added mitigation of potential loss.
short the $85.50 puts and long the $84.50 puts
sold for a credit and expiring May 9
Probability of expiring out-of-the-money
| MAY2 | Strike | OTM |
|---|---|---|
| Upper | 90 | 80.8% |
| Lower | 85.5 | 71.1% |
The risk/reward ratio stands at 2.6:1. The premium is $0.55 ($0.19 for the calls and $0.36 for the puts), with shares trading for $87.10.
COP
Ranges
Click on chart to enlarge.
 |
| COP at 10:12 a.m. New York time, 90 days 2-hour bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 70.28 | 72.96 | 69.72 |
| Lower | 64.91 | 62.23 | 60.57 |
| Gain/loss | 4.0% | 7.9% |
The Trade
The proposed trade below places all but 28 cents at the top of the one standard deviation range within the profit zone. The risk reward ratio is quite a bit higher than I'm comfortable with.
Further narrowing would be arbitrary in terms of the statistical and chart ranges, and I would need to broaden the profit zone considerably at the lower end in order to cover the chart range.
short the $65 puts and long the $64 puts
sold for a credit and expiring May 9
Probability of expiring out-of-the-money
| MAY2 | Strike | OTM |
|---|---|---|
| Upper | 70 | 84.7% |
| Lower | 65 | 78.1% |
The risk/reward ratio stands at 3:1.
Decision for My Account
I've opened a position in XOM as described above. I'm passing on COP because I'm unable to gain adequate profit coverage in return for an acceptable risk/reward ratio.
-- Tim Bovee, Portland, Oregon, April 29, 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.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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