Friday, May 29, 2015

GM Analysis

The automaker General Motors Co. (GM), headquartered in Detroit, Michigan, sent a bull signal in Thursday's trading. GM's bull signals have low historical odds of success, making it a prospective direction-neutral trade.

I shall use the JUN1 Weeklys series of options, which trades for the last time !0 days hence, on June 5.

[GM in Wikipedia]


GM has given five bull signals in the past year, with a 20% success rate. The one successful signal produced a 1.6% profit over four days. The four unsuccessful trades on average each lost 2.6% over 20 days.


Click on chart to enlarge.
GM at 11:05 a.m. New York time, 30 days hourly bars
Implied volatility stands at 20.2%. Volatility dropped below 21% on May 7, to levels never before seen since the company's reorganization under federal direction in 2009. The present level is 1.4 times the VIX, a measure of volatility of the S&P 500 index.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

The by-the-book construction places the short calls at $37 and the short puts at $37.50, close to full coverage. However, that gives me a risk/reward ratio of 3:1 if I make the iron condor 50 cents wide, or 4.9:1 with a one dollar width. I don't find either risk level to be acceptable.

The problem lies with the calls options. The $37 calls have an 80.6% chance of expiring out of the money for maximum profit. The next strike down, the $36.50, have a $62.8% chance, which lower than the 70% I normally aim for.

Decision for My Account

I'm declining to trade GM. The options grid won't allow me to construct a position with sufficient reward to make up for the risk. That's not uncommon when implied volatility is low, and it is radically low in the case of GM compared to its historical levels.

-- Tim Bovee, Portland, Oregon, May 29, 2015


My volatility trading rules can be read here.


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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.

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