Thursday, November 19, 2015

GM Analysis

Update 6/18/2016: The long leg of the diagonal expired worthless today, ending a seven-month odyssey that began well but then sank into the swamp of market malaise that has made trading based on short options so difficult to sustain this year.

I opened the position on Nov. 19, 2015 at a price low, perfect for a net long options spread. Implied volatility was at what has proven to be it's high since August 2015, a level never touched or exceeded since. High IV is, of course, good for the short legs of trades, which are mainly where the money is made in diagonal spreads.

The short legs went like this: 

GMdiagonal, short leg

I was able to keep selling options in the diagonal into April to keep the cash-flow going.  The price fell sharply from when I entered, but the falling IV kept the shorts viable. 

In April, however, GM'S price hit a turning point, a lower high compared to my entry point, and from their began a long slide that continues until today. 

Implied volatility fell into a sideways pattern at a low level, making it impossible to gain sufficient credit to support the short legs, and the long leg sank to a point where it was no longer tradeable, ending finally with expiration.

Over the lifespan of the diagonal, shares declined by 19.1% over 212 days, or a -33% annual rate. The options positions -- short and long -- produced an 18.4% loss on debit for a -32% annual rate.

The automaker General Motors Co. (GM), headquartered in Detroit, Michigan, closed above its 20-day price channel on Thursday. With an historical tendency toward whipsaws after bull signals and low implied volatility relative to its range over the past year, GM is a candidate for a time spread, such as a diagonal.

[GM in Wikipedia]


For the long leg, I shall use the JUN series of options, which trades for the last time 211 days hence, on June 17, 2016, and for the short leg, the DEC series, which completes trading 30 days from now.


Implied volatility stands at 28%, which is 1.6 times the VIX, a measure of volatility of the S&P 500 index. GM’s volatility stands in the 29th percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

GM has completed six bull signals in the past year. One was successful, yielding 6.5% over 30 days. Five were unsuccessful, on average losing 3.0% over 21 days. The win rate is 17%.

Low odds of a successful signal combined with implied volatility in the lower percentiles of the 12-month range is a good set up for a diagonal spread.

Diagonal spread, long the $36 calls expiring June 18, 2016 
and short the $37 calls expiring Dec. 19,
bought with a credit.
Probability of expiring out-of-the-money


For the long leg, the premium is $2.63, and for the short leg, $0.51. The net premium, $2.12, is more than double the width of the position’s wing. The stock at the time of entry was priced at $36.14.

Decision for My Account

I've opened a position on GM as described above.

-- Tim Bovee, Portland, Oregon, Nov. 19, 2015


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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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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