Update 8/6/2015: EMC moved above the profit zone, and I've exited the calls, transforming the position into a bull put spread profitable down to $22. I'll calculate profit and loss after the position expires on Aug. 22.
The infotech infrastructure and support company EMC Corp. (EMC), headquartered in Hopkinton, Massachussetts, publishes earnings Wednesday before the opening bell.
[EMC in Wikipedia]
Click on chart to enlarge.
|EMC at 10:36 a.m. New York time, 2 years daily bars|
Implied volatility stands at 28.5%, which is 2.3 times the VIX, a measure of volatility of the S&P 500 index. EMC’s volatility stands in the 99th percentile of its most recent rise.
|Week||SD1 68.2%||SD2 95%||Chart||Earns|
I shall use the AUG monthly series of options, which trades for the last time 31 days hence, on Aug. 21.
I've skewed the zone of profit sharply to the downside to acknowledge the strong downward trend on this chart.
short the $23.50 puts and long the $22.50 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money
The premium is $0.41, which is 41% of the width of the position’s wings.The stock at the time of purchase was priced at $25.06.
The risk/reward ratio is 1.4:1.
The zone of profit in the proposed trade covers a $1 move either way. The biggest immediate move after each of the past four earnings announcements was $0.81, and the average was $0.35.
Decision for My Account
I've opened a position on EMC as described above.
-- Tim Bovee, Portland, Oregon, July 21, 2015
My volatility trading rules can be read here.
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