MON Analysis

Update 8/8/2016: Contrary to my expectations, MON rose rather than declining, and I exited my bear call spread for a loss within two weeks of expiration.

Shares rose by 3.4% over 28 days, or a +45% annual rate. The options position produced a 29.8% loss on debit for a -266% annual rate.

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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 39 days hence, on Aug. 19.

Ranges

Implied volatility stands at 46%, which is 3.5 times the VIX, a measure of volatility of the S&P 500 index. MON’s volatility stands at the peak of its annual range. The price used for analysis was $101.68.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	117.01	132.34	N/A
Lower	86.35	71.02	N/A
Gain/loss	±$15.33	±$30.66

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

Valuation: Measuring and Managing the Value of Companies, 6th ed. by McKinsey & Company Inc.

The Trade

MON is presently trending downward after hitting a near-term peak on June 10. The trend is also down at the larger degrees.

Based on the chart, I shall use a bear strategy. The chart has $5 spreads separating strikes, lessening the granularity with which I can construct a trade.

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
	105	61.8%

The premium is $1.72, which is 34% of the width of the position’s wings. The stock at the time of entry was priced at $103.03.

The risk/reward ratio is 1.5:1.

The zone of profit in the proposed trade covers a $1.97 move above the order price.

Decision for My Account

I have opened a position on MON as described above.

-- Tim Bovee, Portland, Oregon, July 11, 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.