I shall use the JUN1 Weeklys series of options, which trades for the last time !0 days hence, on June 5.
[MDT in Wikipedia]
Click on chart to enlarge.
|MDT at 10:45 a.m. New York time, 90 days 2-hour bars|
|Week||SD1 68.2%||SD2 95%||Chart|
short the $75 puts and long the $83 puts
sold for a credit and expiring June 6
Probability of expiring out-of-the-money
The risk/reward ratio stands at 2.6:1.
Decision for My Account
I'm passing on the trade. Implied volatility is so low that I can't construct a trade with a reasonable risk/reward ratio. Narrowing the short-long spread brings the premium to only a third of a percent of the underlying stock's price. My best case is 1%. The risk/reward ratio with the narrower spread is 3:1.
A $2 wide spread, as described in the Trade section above, brings the premium up to better than three-quarters of a percent, which is acceptable. However, the risk/reward ratio remains way too high.
-- Tim Bovee, Portland, Oregon, June 1, 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.
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