Monday, June 1, 2015

MDT Analysis

The medical technology company Medtronic PLC (MDT), with executive headquarters in Dublin, Ireland and operational headquarters in Fridley, Minnesota, publishes earnings on Tuesday before the opening bell.

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
Implied volatility stands at 21.8%, which is 1.5 times the VIX, a measure of volatility of the S&P 500 index. Volatility peaked at 34.0% in October 2014 and has been working its way lower since. GM’s volatility stands in the 32nd percentile of its pre-October rise from a low of 15.9%.

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

Iron condor short the $78 calls and long the $80 calls,
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.
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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