Monday, July 13, 2015

WFC Analysis

Update 7/17/2015: The cost of buying back my short iron condor on WFC fell to 68% of the maximum possible profit, and I exited the position.

Shares rose by 1.7% over four days, or a +156% annual rate. The options produced a 212.5% yield on debit, for a +19,391% annual rate.

The financial company Wells Fargo & Co. (WFC), headquartered in San Francisco, California, publishes earnings on Tuesday prior to the opening bell.

[WFC in Wikipedia]



Click on chart to enlarge.
WFC at 11:23 a.m. New York time, 30 days hourly bars
Implied volatility stands at 21.9%, which is 1.5 times the VIX, a measure of volatility of the S&P 500 index. JPM’s volatility stands in the 79th 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 JUL4 weekly series of options, which trades for the last time 11 days hence, on July 24.

Iron condor, short the $59 calls and long the $60 calls,
short the $56 puts and long the $55 puts,
sold for a credit and expiring July 25.
Probability of expiring out-of-the-money

The premium is $0.26, which is 25% of the width of the position’s wings.The stock at the time of purchase was priced at $56.56.

I skewed the profit zone toward the high side to account for the upward trend since July 7. Doing so puts the one standard deviation upper boundary within the zone of profit but leaves the lower boundary in unprofitable territory.

The zone of profit in the proposed trade covers a $1.50 move either way. The biggest immediate move after each of the past four earnings announcements was $1.46, and the average was $0.94.

The risk/reward ratio is 3:1.

Decision for My Account

I've opened a position in WFC as described above.

-- Tim Bovee, Portland, Oregon, July 13, 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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