Shares rose by 1.7% over 45 days, or a +13% annual rate. The options positon produced an 11.7% yield on debit for a +143% annual rate.
Update 11/13/2015: I exited my short calls in this time spread as the profit reached 65% of its potential maximum and sold more alls further out from expiration.
The transactions replaced my NOV-series (expiring Nov. 18) $43 strike calls with DEC4-series (expiring Dec. 24) $42.5 strike calls, allowing me to collect more premium.
As is my practice with time spreads, I shall calculate results only when the entire spread ends, when I exit the long calls.
The banking company U.S. Bancorp (USB), headquartered in Minneapolis, Minnesota, gave a bull signal on Friday. With low implied volatility relative to the past year and low odds of follow through on bull signals, it is a candidate for a time spread.
[USB in Wikipedia]
USB
I shall structure the trade as a diagonal spread. For the short leg, I shall use the NOV series of options, which trades for the last time 25 days hence, on Nov. 20. For the long leg, I shall use the MAR 2016 series, which completes trading March 18, 144 days out.
Odds
USB has completed six bull signals in the pst year. Only one was successful, yielding 3.1% over 46 days. The five unsuccessful signals on average each produced a 3% loss over 23 days. The success rate is 16.7%.
The Trade
For the long leg,
Long the $43 calls
bought with a debit and expiring March 19.
Probability of expiring in-of-the-money
| MAR | Strike | ITM |
|---|---|---|
| 43 | 47.9% |
For the short leg,
sold for a credit and expiring Nov. 20.
Probability of expiring out-of-the-money
| NOV | Strike | OTM |
|---|---|---|
| 43 | 59.6% |
The short-leg premium is $0.49. The stock at the time of entry was priced at $42.42.
Decision for My Account
I've opened a diagonal spread on USB as described above.
-- Tim Bovee, Portland, Oregon, Oct. 26, 2015
References
Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.
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Disclaimer
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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Based on a work at www.timbovee.com.
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