Shares rose by 0.1% over seven days, or a +3.7% annual rate. The options position produced a 100.0% yield on debit, for a +5,214% annual rate.
The chemicals and plastics company E.I. du Pont de Nemours and Co. (DD), headquartered in Wilmington, Delaware, and the oil and gas infrastructure company Kinder Morgan Inc. (KMI), headquartered in Houston, Texas, gave bear signals on Wednesday by breaking below their 20-day price channels.
Both have low historical odds of signals being valid, making them candidates for non-directional trades. DD gave five bull signals in the past 12 months. None of them produced a profit. KMI gave four bear signals, all unprofitable.
I shall use the MAY4 Weeklys series of options, which trades for the last time seven days hence, on May 22.
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.
DD
Ranges
Click on chart to enlarge.
 |
| DD at 11:45 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 72.47 | 74.49 | 75.80 |
| Lower | 68.43 | 66.41 | 69.28 |
| Gain/loss | 2.9% | 5.7% |
The Trade
The best position I can structured leaves 47 cents of the one standard deviation range above the profit zone, and 57 cents of the lower range. However, the probabilities of expiring out of the money for maximum profit are excellent. I wanted to ensure coverage within the profit zone of the mid-point of the May 13 price gap caused by the stock going ex-dividend, since retracement to mid-point is a venerable verity among chartists.
short the $69 puts and long the $68 puts
sold for a credit and expiring May 23
Probability of expiring out-of-the-money
| MAY4 | Strike | OTM |
|---|---|---|
| Upper | 72 | 78.0% |
| Lower | 69 | 76.1% |
The risk/reward ratio stands at 2.6:1, a bit high because I stretched the coverage. The premium is $0.25 ($0.15 for the calls and $0.10 for the puts).
KMI
Ranges
Click on chart to enlarge.
 |
| KMI at 11:50 a.m. New York time, 90 days 2-hour bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 43.70 | 44.94 | 44.71 |
| Lower | 41.20 | 39.96 | 39.45 |
| Gain/loss | 2.9% | 5.9% |
The Trade
Using the general 70% probability of expiring out of the money guidelines that is my usual starting point, I get a profit zone that is $1 wide (short the $43 calls and $42 puts) and a risk/reward ratio of 3.3, which is way high for an iron condor.
short the $42 puts and long the $41 puts
sold for a credit and expiring May 23
Probability of expiring out-of-the-money
| MAY4 | Strike | OTM |
|---|---|---|
| Upper | 43 | 71.9% |
| Lower | 42 | 71.5% |
Noting that the price is declining, I presume that my greatest risk is to the downside, and so I widen the profit zone in that direction...
short the $41 puts and long the $40 puts
sold for a credit and expiring May 23
Probability of expiring out-of-the-money
| MAY4 | Strike | OTM |
|---|---|---|
| Upper | 43 | 71.9% |
| Lower | 41 | 92.3% |
The risk/reward ratio stands at 6.7:1, even higher than the first choice.
Decision for My Account
I've opened a position in DD as described above. I'm declining the trade in KMI because of my inability to get a reasonable risk/reward ratio off of its options grid.
-- Tim Bovee, Portland, Oregon, May 15, 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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