CAM Analysis

Update 8/22/2015: My CAM puts expired Saturday. Shares rose 1.0% over 26 days, or a +15% annual rate. The options produced a 34.2% loss on debit for a -416% annual rate.

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Update 8/13/2015: CAM moved into unprofitable territory to the upside. I've sold the calls portion of the iron condor, transforming the position into a bull put spread profitable down to $42.50. I'll calculate profit and loss when I've exited the puts.

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The manufacturer of flow control devices for the oil and gas industry, Cameron International Corp. (CAM), headquartered in Houston, Texas, publishes earnings on Thursday before the opening bell.

[CAM in Wikipedia]

CAM

Ranges

Click on chart to enlarge.

CAM at 12 p.m. New York time, 90 days 2-hour bars

Implied volatility stands at 40.1%, which is 3.3 times the VIX, a measure of volatility of the S&P 500 index. CAM’s volatility stands at the peak of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	49.92	52.88	56.28	50.72
Lower	44.00	41.04	42.21	43.20
Gain/loss	6.3%	12.6%

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

I shall use the AUG monthly series of options, which trades for the last time 31 days hence, on Aug. 21.
Iron condor, short the $50 calls and long the $52.50 calls,
short the $42.50 puts and long the $40 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	50	75.0%
Lower	42.5	77.4%

The premium is $0.75, which is about a third of the width of the position’s wings.The stock at the time of purchase was priced at $46.83.

The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $3.25 move either way. The biggest immediate move after each of the past four earnings announcements was $3.76, and the average was $2.15.

Decision for My Account

Two characteristics make this trade different than the other five that I've done today: CAM lacks weekly options, forcing me into a longer-term position but with a higher premium, and the strike interval is $2.50, requiring a sacrifice of granularity in setting up the trade.

I've left some of the upper side of the maximum earnings movement range outside of the profit zone but provided coverage beyond that range below the zone. That's in line with the downtrending nature of the stock. The average range is entirely covered.

I've opened a position in CAM as described above.

-- Tim Bovee, Portland, Oregon, July 22, 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.

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Based on a work at www.timbovee.com.