Update 8/21/2015: MOS slipped below the profit zone on the positions last day of trading before expiration. The decline was part of a broad market movement to the downside.
I've exited the puts portion of the position, transforming the iron condor into a bear call spread. I shall calculate profit and loss after the calls expire on Saturday, wrapping up the entire position.
Update 8/3/2015: I've opened a position in MOS, structured as described in Proposed Trade #3.
The premium is $0.31, which is 21% of the width of the position’s wings. The risk/reward ratio is 5.5:1.
The agricultural nutrients company The Mosaic Co. (MOS), headquartered in Plymouth, Minnesota, publishes earnings on Tuesday before the opening bell.
[MOS in Wikipedia]
MOS
I shall use the AUG2 weekly series of options, which trades for the last time 11 days hence, on Aug. 14.
Ranges
Click on chart to enlarge.
 |
| MOS after the 7/31 close, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart | Earns |
|---|---|---|---|---|
| Upper | 44.25 | 45.56 | 45.28 | 44.94 |
| Lower | 41.63 | 40.32 | 42.00 | 40.94 |
| Gain/loss | 3.1% | 6.1% |
The Trade
Proposed Trade #1:
Proposed Trade #1 is a standard "by the book" construction under my guidelines. It uses the AUG2 series, which expires in fewer than 10 days, and places the maximum earnings movement range, and also the one standard deviation range, within the zone of profit.
short the $40.50 puts and long the $39.50 puts,
sold for a credit and expiring Aug. 15.
Probability of expiring out-of-the-money
| AUG2 | Strike | OTM |
|---|---|---|
| Upper | 45 | 79.9% |
| Lower | 40.5 | 80.8% |
The premium is $0.13, which is 13% of the width of the position’s wings.The stock at the time of analysis was priced at $42.94.
The risk/reward ratio is 6.7:1.
The zone of profit in the proposed trade covers a $2.25 move either way. The biggest immediate move after each of the past four earnings announcements was $2.00, and the average was $1.21.
The difficulty with the position is that the puts lack liquidity below 40; the $39.50 puts have zero open interest. The same holds true for the current and next two out options series: The AUG1 and AUG2 weeklys and the AUG monthlys.
Moreover, the risk/reward ratio is extremely high given the odds of expiring out of the money, which are around 80%.
Proposed Trade #2:
An alternative is to go further out, to AUG, thereby increasing both the liquidity and premiums, and shrinking the zone of profit to ensure all options have sufficient open interest to meet my standards.
It places most of the one standard deviation range within the profit zone.
Iron condor, short the $44 calls and long the $45 calls,
short the $41 puts and long the $40 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money
| AUG | Strike | OTM |
|---|---|---|
| Upper | 44 | 67.7% |
| Lower | 41 | 75.6% |
The premium is $0.41, which is 41% of the width of the position’s wings.
The risk/reward ratio is 1:1.
The zone of profit in the proposed trade covers a $1.50 move either way, 50 cents less than the maximum post-earnings movement but above the average.
Proposed Trade #3:
I can improve on the premium, and therefore the maximum profit, at the cost of increased risk. This is in line with a style of iron condor that trader Tom Sosnoff calls the "big boy iron condor", as a replacement for strangles. He explains it here on his tastytrade.com website.
For my purposes, I define an iron condor as "big boy" if it has a risk/reward ratio of between 3:1 and 5:1; my normal iron condors must have a risk/reward ratio of 2:1 or under.
With MOS, I'm stuck on the downside. I can go no lower without losing liquidity. There is, however, no shame in having an iron condor with lopsided wings flapping through my portfolio. So I'll work on the upper boundary.
I can rase the short call to put the odds of expiring out of the money more in line with the short put, and double the width of the wing to $2.
Iron condor, short the $45 calls and long the $47 calls,
short the $41 puts and long the $40 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money
| AUG | Strike | OTM |
|---|---|---|
| Upper | 45 | 67.7% |
| Lower | 41 | 75.6% |
The premium is $0.36, which is 24% of the width of the position’s wings.
The risk/reward ratio is 4.6:1.
The zone of profit in the proposed trade covers a $2.00 move either way, the same as the maximum post-earnings movement.
This analysis is being posted prior to the market open because I'm trading from East Asia, where the U.S. markets open at night. I intend to attempt to trade MOS using the Proposed Trade #3 structure and shall update this analysis with the outcome of the attempt.
-- Tim Bovee, Fukuoka, Japan, Aug. 3, 2015
References
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.License
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