[POT in Wikipedia]
I shall use the SEP series of options, which trades for the last time 35 days hence, on Sept. 16.
Implied volatility stands at 35%, which is triple the VIX, a measure of volatility of the S&P 500 index. POT’s volatility stands in the 29th percentile of its annual range. The price used for analysis was $18.54.
|Week||SD1 68.2%||SD2 95%||Earns|
I'm looking at POT to see whether it's possible to construct a viable position with implied volaitlity below my normal standards. I prefer that IV be at the 50th percentile or higher relative to the one-year range. POT misses that standard by a wide margin.
by Eckhard Hein et al.
POT has been running sideways on the chart from Jan. 25 following an unrelenting decline from Feb. 19, 2015. I'll attempt a direction-neutral position.
short the $15 puts and long the $15 puts,
sold for a credit and expiring Sept. 17.
Probability of expiring out-of-the-money
The premium is $0.14, which is 14% of the width of the position’s wings.
The risk/reward ratio is 6.7:1.
The zone of profit in the proposed trade covers a $3.00 move either way.
Decision for My Account
This is not an awful position. It covers most of the one standard deviation range and has a high probability of expiring out of the money for maximum profit.
However, low premium produces a risk/reward ratio that is abysmal and makes it not worthwhile to take the trade.
The impact manifests like this. Take a hypothetical $500 trade (in line with my practice of entering many small trades rather than a few big ones).
The number of contracts I can sell mustn't exceed that $500 by a great amount, so for this trade, I'm dealing in six contracts, producing a $516 maximum loss and an $86 maximum profit. My practice is to exit a position when it hits 50% of maximum profit, which means a $42 gross profit on the trade.
Subtract $20 in brokerage fees for the round trip, plus $4.50 in options exchange fees, and the net profit before taxes is $17.50. Not worth the effort.
I'm passing on POT.
-- Tim Bovee, Portland, Oregon, Aug. 12, 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.
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