MON Analysis

The agricultural products company Monsanto Co., a leader in genetically modified foods headquartered in Creve Coeur, Missouri,  closed on Friday with implied volatility above the midpoint of its one-year range, making it eligible for a closer look and perhaps a trade.

[MON in Wikipedia]

MON

I shall use the AUG series of options, which trades for the last time 45 days hence, on Aug. 19.

Ranges

Implied volatility stands at 45%, which is 2.8 times the VIX, a measure of volatility of the S&P 500 index. MON’s volatility stands at the top of its one-year range. The price used for analysis was $100.60.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	116.33	132.05	N/A
Lower	84.87	69.15	N/A
Gain/loss	±$15.73	±$31.45

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

Volatility Trading by Euan Sinclair

The Trade

MON peaked in June 2008 and has been in a downtrend since. The price dropped significantly in to July 2010, corrected upward into June 2014, declined to a low on Sept. 24, 2015 and then a lower high on June 10, 2015. The price has headed south ever since.

Brokers in aggregate give MON an 8% enthusiasm index, with 54% of 13 analysts issuing strong buy recommendations.

I shall follow the chart for this trade and construct a bear position.
Bear call spread, short the $105 calls and long the $110 calls,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

AUG	Strike	OTM
	110	64.9%

The premium is $1.13, which is 23% of the width of the position’s wings. The stock at the time of entry was priced at $x.xx.

The risk/reward ratio is 3.1:1.

The risk/reward ratio is higher than I like, a result of the $5 spread between strike prices. Let's go to Plan B, a neutral strategy.

Iron condor, short the $115 calls and long the $120 calls,
short the $85 puts and long the $89 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	115	82.6%
Lower	85	84.3%

The premium is $1.12, which is 22% of the width of the position’s wings.

The risk/reward ratio is 3.5:1.

The zone of profit in the proposed trade covers a $15 move either way.

Decision for My Account

I dislike the risk/reward ratio on both trades. It's within my guidelines, but it makes the positions cost more than I want to pay. Better to hang on to my resources for ernings season, which begins next week. I'm passing on MON. No. trade.

-- Tim Bovee, Portland, Oregon, June 5, 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.