Monday, January 25, 2016

Monday's Agenda

Two symbols are on my desk this morning for potential trades coinciding with their earnings announcements: JNJ and PG. I shall analyze PG but am summarily passing on JNJ.

It's not that JNJ is a bad trade on the face of it, but I am tightening my criteria for this earnings season.

We have entered the peak weeks of the earnings season, a period that will serve up more potential trades than I can possibly manage, both in time and resources.

In addition we have entered a time of heightened volatility, and heightened volatility of volatility. The rapid and unpredictable changes that are ensuing make it unwise to enter many new positions within a narrow span of time. Better to space them out, providing a degree of diversification of hte calendar.

Out of the 20 potential trades that are coming my way this week, my goal is to enter more more than five. I'll do full analyses of the likeliest prospects, based on the quality of the options grid: High strike price granularity in relation to price, high and well  spaced open interest, and narrowness of the bid/ask spreads.

Implied volatility level is another important element of the decision. I'll be looking for volatility in at least the 66th percentile of the most recent range (measured low turning point to subsequent high turning point). I shall, on occasion, tighten this to the 75th percentile in order to keep the number of potential trades u under control.

I'll also be considering the sector of the underlying stock, since some, like fossil fuels, have entered a period of political and diplomatic uncertainty that goes beyond the ability of my maths to analyze.

The criteria I've selected all, in my opinion, will increases the chances of a successful trade. Guaranteed? No. When is it ever?

At the start of the trading day I'll say in the Agenda post which symbols will get the full treatment and which will be left stranded on the wayside, with explanations of both decisions.

Looking at today's symbols, PG has implied volatility in the 84th percentile, with strikes prices spaced on the grid so that there are about 31 strike intervals within the price of a share of stock (I call it the interval index: price / strike interval = interval index; the higher the index, the more attractive the trade).

JNJ, on the other hand, has implied volatility in the 65th percentile with an interval index of 19.

Neither symbol is in a difficult sector, and both have good grids for trading when it comes to the distribution of open interest.

So, PG makes the cut, and JNJ does not.

Interesting days. This should be fun.

-- Tim Bovee, Portland, Oregon, Jan. 25, 2016


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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