Friday, July 24, 2015

NSC Analysis

The freight railroad Norfolk Southern Corp. (NSC), headquartered in Norfolk, Virginia, publishes earnings on Monday before the opening bell.

[NSC in Wikipedia]



Click on chart to enlarge.
NSC at 10:15 a.m. New York time, 30 days hourly bars
Implied volatility stands at 23.8%, which is 1.8 times the VIX, a measure of volatility of the S&P 500 index. NSC’s volatility stands in the 67th percentile 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 seven days hence, on July 31.

In constructing the proposed position, I've focused on the maximum movement immediately after earnings announcements for the lower boundary, and then stretched a bit more. This puts more of the downside into the profit zone, which matches the bearish nature of the chart.

I've left $1.39 of the maximum earnings movement at the topside beyond the profit zone in order to reduce the risk/reward ratio to an acceptable level.

All of the average post-earnings movement range is within the profit zone, as is all but 80 cents of the one standard deviation range.

Iron condor, short the $86 calls and long the $87 calls,
short the $79 puts and long the $78 puts,
sold for a credit and expiring Aug. 1.
Probability of expiring out-of-the-money


The premium is $0.40, which is 40% of the width of the position’s wings.The stock at the time of analysis was priced at $83.47.

The risk/reward ratio is 3:1.

The zone of profit in the proposed trade covers a $3.50 move either way. The biggest immediate move after each of the past four earnings announcements was $3.35, and the average was $1.87.

An alternate construction, placing the lower boundary at $80.50, produced a 1.5:1 risk/reward ratio with a $0.25 premium. However, the profit zone coverage was reduced to $2.75 either way.

Decision for My Account

Too much risk for too little reward. I'm declining to take the trade and won't open a position to coincide with NSC's earnings announcement.

-- Tim Bovee, Portland, Oregon, July 24, 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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