Thursday, August 18, 2016

MON Analysis

Update 9/14/2016: MON's implied volatility moved sharply downward, bringing the bear call spread profit high enough for an exit at 73% of potential profit. The move followed new that Monsanto had agreed to a buyout by Bayer AG.

Shares rose by 2.7% over 27 days, or a +36% annual rate. The options position produced a 271.4% yield on debit for a +3,669% annual rate.

The agricultural products company Monsanto Co., a leader in genetically modified foods headquartered in Creve Coeur, Missouri, has high implied volatility relative to its one-year range, making it a candidate for a strategy based on selling options contracts short.

[MON in Wikipedia]


I shall use the OCT series of options, which trades for the last time 64 days hence, on Oct. 21.


Implied volatility stands at 35%, which is triple the VIX, a measure of volatility of the S&P 500 index. MON’s volatility stands in the 57th percentile of its annual range. The price used for analysis was $103.80.

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

Illusions of Wealth: Actively Manage Your Investments or Expect Losses in this Volatile Economy
by Doug Eberhardt

The Trade

MON is has been tracing a corrective pattern to the downside after peaking in June 2008, at the outset of the Great Recession. Within the pattern, downwave was followed beginning in July 2010 with an upwave that fell short of the 2007 peak. The ensuing second downwave is off of its own peak, which so far fits the pattern of an upward correction within the downtrending wave.

The price has been repeatedly piercing its 50-day moving average since late June, and the average itself began to decline on Aug. 3, a bearish indicator.

Based on the chart alone, I'm bearish to neutral in my near-term assessment of MON.

Recent changes in analyst assessment suggest the possibility of an upside earnings surprise. However, that contradicts the prevailing bearish assessment, so I don't set much store by it.

Brokers in aggregate give MON a 17% enthusiasm index, with 58% of 12 analysts issuing strong-buy recommendations.

After the weighing the preponderance of the data, I shall go with a neutral position.

Iron condor, short the $115 calls and long the $120 calls,
short the $90 puts and long the $85 puts,
sold for a credit and expiring Oct. 22.
Probability of expiring out-of-the-money


The premium is $1.30, which is 27% of the width of the position’s wings.

The risk/reward ratio is 2.8:1.

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

Decision for My Account

I have entered a position on MON as described above. The stock at the time of entry was priced at $103.96.

-- Tim Bovee, Portland, Oregon, Aug. 18, 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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