Monday, June 20, 2016

EWG Analysis

Implied volatility on the iShares MSCI Germany exchange-traded fund (EWG), which tracks German stocks, has shot sharply upward as the June 23 vote on the United Kingdom leaving the European Union approaches, known as Brexit. The fund's top five holdings by weight are BAYN, SAP, BAS, ALV and DTE. The expense ratio is 0.48%.

[Economy of Germany in Wikipedia]


I shall use the JUL series of options, which trades for the last time 25 days hence, on July 15.


Implied volatility stands at 34 %, which is double the VIX, a measure of volatility of the S&P 500 index. EWG’s volatility stands in the 80th percentile of its most recent range. The price used for analysis was $25.65.

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

The Trade

I'll go direction neutral in my strategy, given the wide variety of polls and predictons regarding the outcome of the Brexit vote.

The CBOE has added AUG series options to EWG but they lack liquidity, so I'll use the JUL series.

Iron condor, short the $27 calls and long the $28 calls,
short the $23 puts and long the $22 puts,
sold for a credit and expiring July 16.
Probability of expiring out-of-the-money


The premium is $0.22, which is 22% of the width of the position’s wings, lower than I prefer.

The risk/reward ratio is 3.5:1.

The zone of profit in the proposed trade covers a $2.00 move either way.

Decision for My Account

The nature of the options grid makes it impossible for me to get sufficient profit to make the risk worthwhile. I'm passing on EWG. No trade.

-- Tim Bovee, Portland, Oregon, June 20, 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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