Shares declined by 1.1% over three days, or a -13% annual rate. The options position produced a 71.8% yield on debit, for a +8,735% annual rate.
Update 5/19/2015: WMT's price fell sharply to below the zone of profit after earnings were published, and I've exited the position for a loss.
Shares declined by 3.7% in one day, or a -1,336% annual rate. The options position produced a 97.1% loss on debit, for a -35,457% annual rate.
The discount retail chain Wal-Mart Stores Inc. (WMT), headquartered in Bentonville, Arkansas, and the home improvement retail chain Home Depot Inc. (HD), headquartered in Cobb County, Georgia, publish earnings on Tuesday before the opening bell.
I shall use the MAY4 Weeklys series of options, which trades for the last time four 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.
WMT
Ranges
Click on chart to enlarge.
 |
| WMT at 9:55 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 80.81 | 82.32 | 80.93 |
| Lower | 77.79 | 76.28 | 77.17 |
| Gain/loss | 1.9% | 3.8% |
The Trade
short the $77.50 puts and long the $76.50 puts
sold for a credit and expiring May 23
Probability of expiring out-of-the-money
| MAY4 | Strike | OTM |
|---|---|---|
| Upper | 81 | 73.9% |
| Lower | 77.5 | 75.77% |
The risk/reward ratio stands at 1.7:1. The width dividing the two short options is 3.5 times the average true range. The premium is $0.35 ($0.20 for the calls and $0.15 for the puts).
HD
Ranges
Click on chart to enlarge.
 |
| HD at 10:00 a.m. New York time, 90 days 2-hour bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 116.57 | 119.18 | 117.99 |
| Lower | 111.35 | 108.74 | 106.62 |
| Gain/loss | 2.3% | 4.6% |
The Trade
short the $111 puts and long the $110 puts
sold for a credit and expiring May 23
Probability of expiring out-of-the-money
| MAY4 | Strike | OTM |
|---|---|---|
| Upper | 117 | 79.4% |
| Lower | 111 | 72.2% |
The risk/reward ratio is 1.5:1. The width dividing the two short options is 3.3 times the average true range. the premium is $0.39 ($0.12 for the calls and $0.27 for the puts).
Decision for My Account
I've opened positions in WMT and HD as described above.
-- Tim Bovee, Portland, Oregon, May 18, 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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