DOW Analysis

Update 8/1/2015: The DOW calls expired  without value.

Shares declined by 7.3% over the 7.5 day average lifespan of the position, or a -357% annual rate The options produced a +-59.4% loss on debit, for a -2.892% annual rate.

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Update 7/27/2015: DOW declined sharply for two days straight after publishing earnings. Profits beat the Street's expecations, but revenues came in a bit short. 

I exited the puts to mitigate the loss, transforming the position into a bear call spread. I'll calculate the overall loss for the entire position when the calls expire on Aug. 1.

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The plastics, chemicals and agricultural products manufacturer Dow Chemical Co. (DOW), headquartered in Midland, Michigan, publishes earnings on Thursday before the opening bell.

[DOW in Wikipedia]

DOW

Ranges

Click on chart to enlarge.

DOW at 10:50 a.m. New York time, 30 days hourly bars

Implied volatility stands at 29.5%, which is 2.4 times the VIX, a measure of volatility of the S&P 500 index. DOW’s volatility stands in the 90th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	52.28	54.58	53.20	51.93
Lower	47.63	45.32	49.06	47.97
Gain/loss	4.6%	9.3%

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

I shall use the JUL5 weekly series of options, which trades for the last time nine days hence, on July 31.

Iron condor, short the $51.50 calls and long the $52.50 calls,
short the $47 puts and long the $46 puts,
sold for a credit and expiring Aug. 1.
Probability of expiring out-of-the-money

JUL5	Strike	OTM
Upper	51.5	78.6%
Lower	47	82.1%

The premium is $0.28, which is a bit over one fourth of the width of the position’s wings.The stock at the time of purchase was priced at $50.0\01.

The risk/reward ratio is 2.6:1.

The zone of profit in the proposed trade covers a $2.25 move either way. The biggest immediate move after each of the past four earnings announcements was $1.98, and the average was $1.29.

Decision for My Account

The stock is downtrending, and I've compromised the profit zone at the top end in order to gain sufficient premium. Even so, the risk/reward ratio is fairly high.

Given the strength of the downtrend, I'm willing to take the risk implied by the compromised profit zone. I've opened a position in DOW 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.