Monday, December 7, 2015

PM Analysis

The tobacco products company Philip Morris International Inc. (PM), headquartered in New  York City, closed above its 20-day price channel on Friday. With low historical odds of success and with low implied volatility, PM is a candidate for a non-directional time spread, such as a covered call or a diagonal spread.
[PM in Wikipedia]


For the short leg, I shall use the JAN series of options, which trades for the last time 39 days hence, on Jan. 16, and for the long leg, the JUN series, which completes trading in 193 days on June 19.


Implied volatility stands at 20%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. PM’s volatility stands in the 28th 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

PM has completed four bull signals in the past year. One was successful, yielding 2.6% over 29 days. The three unsuccessful signals produced on average a 2.8% loss over 28 days. The win rate is 25%.

With PM having low implied volatility and also low historical odds of a profitable bull signal, I shall consider it for a diagonal spread, an analog to the covered call that ties up much less capital, since it uses options for the long leg.

One complicating factor in PM is its high dividend yield of 4.55% annualized at today's prices.

Diagonal spread, long the $87.50 calls expiring June 20, 2016
and short the $90 calls expiring Jan. 17, 2016
bought with a credit.
Probability of expiring out-of-the-money

JUN 1687.556.2%

The premium is $3.90 for the long leg and $0.79 for the short leg, with an entry debit of $3.11. The stock at the time of analysis was priced at $88.70.

Decision for My Account

It's a reasonably trade but I'm declining to take it because of the high dividend yield, which is an invitation to exercise just before the ex-dividend date.

It's not a major problem by any means, but it complicates management and I prefer to avoid it. If I were using a covered call strategy instead, then I would seek out the higher dividend to add to my profit, but I receive no dividend from a diagonal spread.

-- Tim Bovee, Portland, Oregon, Dec. 7, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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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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