Friday, August 12, 2016

POT Analysis

The fertilizer producer Potash Corporation of Saskatchewan Inc. (POT), headquartered in Saskatoon, Saskatchewan, is showing high implied volatility relative to the annual range compared to other prospects, although in absolute terms IV is on the low side.

[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.

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

The Trade

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.

Financialisation and the Financial and Economic Crises
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.

Iron condor, short the $18 calls and long the $18 calls,
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.
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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