HSBC Analysis

Implied volatility on banking and financial services company HSBC Holdings plc (HSBC), headquartered in London, has risen significantly as the June 23 vote on the United Kingdom leaving the European Union approaches, known as Brexit. London is the largest money center within the EU, and the U.K.'s exit from the confederation would have a profound impact on the financial business.

[HSBC in Wikipedia]

HSBC

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

Ranges

Implied volatility stands at 37%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. HSBC’s volatility stands in the 60th percentile of its most recent range. The price used for analysis was $33.24.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	38.16	43.08	N/A
Lower	28.31	23.39	N/A
Gain/loss	±$4.92	±$9.64	±$0

Implied volatility 1 and 2 standard deviations; central tendency earns move
The Trade

The events futures trading platform PredictIt gives the exit side only a 25% 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.

HSBC publishes earnings on Aug. 3, within the lifespan of the options, and so I shall need to decide at that point whether to go for a new position or hold this one through the earnings publication. The stock has been in a downtrend since May 2013

Iron condor, short the $35 calls and long the $36 calls,
short the $28 puts and long the $27 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	35	81.3%
Lower	28	79.6%

The premium is $0.29, which is 29% of the width of the position’s wings. The stock at the time of the order was priced at $32.18.

The risk/reward ratio is 2.4:1.

The zone of profit in the proposed trade covers a $3.50 move either way.

Decision for My Account

The order expired without being filled.

-- Tim Bovee, Portland, Oregon, June 20, 2016

References

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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Disclaimer

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.

License



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Based on a work at www.timbovee.com.