DUK Momentum

The power generation company Duke Energy Corp. (DUK), headquartered in Charlotte, North Carolina, broke above its 20-day price channel on Tuesday and confirmed the bull signal by continuing to trade above the breakout point the next day.

[DUK in Wikipedia]

DUK

Odds

DUK was wrongly put in the high-odds category. Its previous bull signals have split evenly, with two coming out with a profit and two with a loss. the successful trdes on average produced a 4% yield over 59 days; the losers, a 3.1% loss over 39 days.

Despite the error in the early analysis, I shall soldier on and see if there is indeed a trade to be found in DUK.

Ranges

Click on chart to enlarge.

DUK at 11:15 a.m. New York time, 30 days hourly bars

Implied volatility stands at 20.7%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. DUK’s volatility stands in the 93rd percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	77.39	79.83	75.71	N/A
Lower	72.51	70.07	70.24	N/A
Gain/loss	3.3%	6.5%

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

I shall use the JUL monthly series of options, which trades for the last time nine days hence, on July 17.

Bull put spread, short the $72.50 puts and long the $70 puts,
sold for a credit and expiring July 18.
Probability of expiring out-of-the-money

JUL	Strike	OTM
	72.5	83.1%

The premium is $0.12, which is 5% of the width of the position’s wing. I prefer a 33% width. The stock at the time of analysis was priced at $75.14.

The difficulty lies in the risk/reward ratio. A structure that covers the lower boundary of the one standard deviation range produces a 19.8:1 risk/reward ratio. That's far higher than I'm willing to accept. Generally, 7:1 or so is as high as I'll go with a directional play.

Decision for My Account

I'm passing on DUK because of the high risk/reward ratio. No trade.

-- Tim Bovee, Portland, Oregon, July 8, 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



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Based on a work at www.timbovee.com.