Monday, June 20, 2016

EFA Analysis

Update 7/8/2016: I exited EFA slightly below the optimal profit point into order to clear it out before the weekend. Being a news-based play, relying on the aftermath of the Brexit vote, I judge it to be particularly vulnerable to political risk. The exit point was at 46.7% of maximum profit; I normally trying for 50%.

Shares declined sharply after the U.K. voted to leave the European Union, yet stayed within my profit range of $61 to $52 and indeed was 6.3% above the lower boundary of profitability at the time that I exited. An excess of caution.

Shares declined by 5.1% over 17 days, or a -110% annual rate. The options position produced a 87.5% yield on debit for a +1,879% annual rate.

Updated 6/21/2016 with an attempt to get a fill.

Implied volatility on the iShares MSCI EAFE Index exchange-traded fund (EFA), which tracks global stocks, has moved higher at a rapid pace as the June 23 vote on the United Kingdom leaving the European Union approaches, known as Brexit.

Half of the fund's holdings are based in the EU. Japanese companies are the large single-country portion of the holdings, at 23%. The top holdings by weight are ROG (Switzlerland); BATS and GSK (U.K.), CBA (Australia) and SAN (Spain). The expense ratio is 0.33%.


I shall use the AUG series of options, which trades for the last time 60 days hence, on Aug. 19.


Implied volatility stands at 27%, which is 1.5 times the VIX, a measure of volatility of the S&P 500 index. EFA’s volatility stands in the 77th percentile of its most recent range. The price used for analysis was $58.28.

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

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World
by Ruchir Sharma

The Trade

The events futures trading platform PredictIt gives the exit side only a 27% chance of winning the vote. Some public opinion polling gives stay a slight edge but essentially, by that measure, opinion is split pretty much evenly.

I shall take the cautious course and hedge my bet either way by using a direction-neutral strategy.

Iron condor, short the $61 calls and long the $62 calls,
short the $52 puts and long the $51 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money


The premium is $0.30, which is 30% of the width of the position’s wings. The stock at the time of the entry was priced at $58.27.

The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $4.5 move either way.

Decision for My Account

I have opened a position on EFA as described above.

-- Tim Bovee, Portland, Oregon, June 21, 2016


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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