Tuesday, September 1, 2015

VNQ Analysis

The Vanguard REIT Index Fund (VNQ), which invests in real-estate investment trusts, was the object of an 83-day trade that ended profitably on Monday. I'm looking to re-establish the position for another period.

[REITs in Wikipedia]


The position I exited was structured as a strangle, with no built-in limit on loss. This time, I'll build an iron condor, which as a defined maximum loss.

I shall use the OCT monthly series of options, which trades for the last time 45 days hence, on Oct. 16.


Click on chart to enlarge.
VNQ at 12:25 p.m. New York time, one year daily bars
Implied volatility stands at 27.3%, which is 9/10ths the VIX, a measure of volatility of the S&P 500 index. VNQ’s volatility stands at the peak 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

And so I turn to the options grid, and find that there is insufficient open interest to support a trade. For October, one call strike, $77, has four-digit open interest, and the rest are in double digits or zilch. All of the put strikes are double digits or zero.

Having come this far, I go ahead and work out a position, but under my rules the number of contracts in play is too small to meet my needs.

The skewing of the iron condor to the upside is an artifact of the options grid. From $65 down it moves to $5 intervals between strikes which, had I one lower to a $65 short put, would have required that wing to be $5 wide rather than the $2 that I preferred.

Iron condor, short the $77 calls and long the $79 calls,
short the $67 puts and long the $65 puts,
sold for a credit and expiring Sept. 19.
Probability of expiring out-of-the-money


The premium is $0.60, which is 30% of the width of the position’s wings.The stock at the time of analysis was priced at $72.61.

The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $5 move either way, or 3.2 times the average true range.

Decision for My Account

I won't be opening a position in VNQ for the reasons stated above.

-- Tim Bovee, Portland, Oregon, Sept. 1, 2015


My volatility trading rules can be read here.


Two social media feeds provide notification whenever something new is posted.

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.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

No comments:

Post a Comment