Monday, September 21, 2015

GIS Analysis

The food manufacturer General Mills Inc. (GIS), best known for its breakfast cereals and headquartered in Golden Valley, Minnesota, publishes earnings on Tuesday before the opening bell.

[GIS in Wikipedia]


I shall use the OCT series of options, which trades for the last time 25 days hence, on Oct 16.


Click on chart to enlarge.
GIS at 10:45 a.m. New York time, 30 days hourly bars
Implied volatility stands at 25%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. GIS’s volatility stands in the 64th percentile of its annual range.

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

The GIS options grid has strikes set $2.50 apart and is structured in such a way as to have huge gaps in the probabilities of a contract expiring out of the money for maximum profit.

I've built a standard proposed trade, with the probabilities set as close to 80% as possible with this grid.

Iron condor, short the $60 calls and long the $62.5 calls,
short the $52.50 puts and long the $50 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money


The next further in short strikes, which would increase premium, are the $57.50 calls with a 61.3% probability of expiring OTM and the $55 puts with a 68.7% probability. The probabilities in those cases are way too low for my taste.

The trade, as constructed above, has these characteristics:

The premium is $0.23, which is 9% of the width of the position’s wings.The stock at the time of analysis was priced at $56.93.

The risk/reward ratio is 9.9:1.

The zone of profit in the proposed trade covers a $3.75 move either way. The biggest immediate move after each of the past four earnings announcements was $2.35, and the average was $1.40.

Decision for My Account

I'm not going to trade GIS based on this analysis.  The grid forces the short strikes to be overly wide in order to have sufficient probability of a profitable trade. The lower probability strikes would not have covered the range of maximum movement post-earnings.

My trading strategy takes the wish of Effie Trinket, the escort in Suzanne Collins distopian future, as its guide: "Happy Hunger Games. And may the odds be ever in your favor!" With GIS, clearly they are not.

-- Tim Bovee, Portland, Oregon, Sept. 21, 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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