BAC Analysis

The financial company Bank of America Corp. (BAC), headquartered in Charlotte, North Carolina, publishes earnings on Wednesday before the opening bell.

[BAC in Wikipedia]

BAC

Ranges

Click on chart to enlarge.

BAC at 9:45 a.m. New York time, 30 days hourly bars

Implied volatility stands at 25.6%, which is 1.8 times the VIX, a measure of volatility of the S&P 500 index. BAC’s volatility stands in the 68th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	17.73	18.48	17.31	17.54
Lower	16.21	15.46	16.32	15.86
Gain/loss	4.5%	8.9%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

I shall use the JUL4 weekly series of options, which trades for the last time nine days hence, on July 24.

My primary goal in building a trade will be to put within the profit zone the entire range implied by post moves triggered by earnings announcements. The maximum range produces small credit -- $0.12 -- and a high risk/reward ratio -- 7.3:1.

Iron condor, short the $17.50 calls and long the $18.50 calls,
short the $15.50 puts and long the $14.50 puts,
sold for a credit and expiring July 25.
Probability of expiring out-of-the-money

JUL4	Strike	OTM
Upper	17.50	75.0%
Lower	15.50	95.5%

One way to mitigate the problem is to use the average post-earnings move rather than the maximum.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	17.73	18.48	17.31	17.22
Lower	16.21	15.46	16.32	16.18
Gain/loss	4.5%	8.9%

Implied volatility 1 and 2 standard deviations; chart support and resistance, average earns move

Iron condor, short the $17.50 calls and long the $18.50 calls,
short the $16.50 puts and long the $15.50 puts,
sold for a credit and expiring July 25.
Probability of expiring out-of-the-money

JUL4	Strike	OTM
Upper	17.50	75.0%
Lower	16.50	74.2%

That raises the credit to $0.21 and improves the risk/reward ratio to 3.8:1. Still not the best but marginally acceptable. It also has the advantage of eliminating the skewing to the side of the odds of the position expiring out of the money for maximum profit.

And look at the other ranges. The one standard deviation range is unprofitable at the lower end, as is the chart range.

Moving the expiration date out to Aug. 22, when the monthlys expire, has no impact on the credit because of the need to wide the coverage range to match the available strike prices. It improves the profit zone, but not the risk/reward ratio.

Decision for My Account

I'm passing on this trade. It's impossible to gain enough credit with a profit zone sufficiently wide to match my comfort zone. No trade.

-- Tim Bovee, Portland, Oregon, July 14, 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.