Wednesday, July 22, 2015

GM Analysis

Update 7/29/2015: GM closed up by $1.20 after publishing earnings, placing the call spread out of the money. I exited the calls while retaining the puts, a move that transformed the iron condor into a bull put spread that is profitable down to $28.

The magnitude of the price move was within GM's norms, coming in at less than the average for the last month. In the analysis I said: 
The zone of profit in the proposed trade covers a $1.75 move either way. The biggest immediate move after each of the past four earnings announcements was $1.85, and the average was $1.29.
However, to reduce the risk/reward ratio to a level that met my preferences, I skewed the profit zone to the downside. The gap was to the upside, and so I managed the position for mitigate further loss.

The position expires on Saturday, Aug. 1, and I shall calculate profit and loss at that time.

The automaker General Motors Co. (GM), headquartered in Detroit, Michigan, publishes earnings on Thursday before the opening bell.

[GM in Wikipedia]



Click on chart to enlarge.
GM at 9:59 a.m. New York time, 30 days hourly bars
Implied volatility stands at 29.9%, which is 2.4 times the VIX, a measure of volatility of the S&P 500 index. GM’s volatility stands at the top of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
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.

Because of the downtrending chart, I've skewed the zone of profit to the downside.

Iron condor, short the $31.50 calls and long the $32.50 calls,
short the $28 puts and long the $27 puts,
sold for a credit and expiring Aug. 1.
Probability of expiring out-of-the-money

The premium is $0.36 which is 36% of the width of the position’s wings.The stock at the time of purchase was priced at $30.19.

The risk/reward ratio is 1.9:1.

The zone of profit in the proposed trade covers a $1.75 move either way. The biggest immediate move after each of the past four earnings announcements was $1.85, and the average was $1.29.

Decision for My Account

I've opened a position in GM as described above. In order to get sufficient premium I left part of the maximum earnings range to the topside beyond the zone of profit, although the entire average range is within the profit zone.

-- Tim Bovee, Portland, Oregon, July 22, 2015


My volatility trading rules can be read here.


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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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