Friday, September 16, 2016

PG Analysis

The packaged products company, Procter & Gamble Corp. (PG), headquartered in Cincinnati, Ohio and producing lines of beauty, grooming, fabric care and other household products, has implied volatility in the upper half of its annual range and so qualifies for a closer look.

[PG in Wikipedia]


I shall use the OCT series of options, which trades for the last time 35 days hence, on Oct. 21.


Implied volatility stands at 22%, which is 1.3 times the VIX, a measure of volatility of the S&P 500 index. PG’s volatility stands in the 70th percentile of its annual range. The price used for analysis was $87.47.

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

PG's most recent rise began in May and fell off from a peak of $88.87 in late August. My Elliott wave analysis puts in the 4th wave of a higher order 5th wave, so I expect some upside exceeding the peak after the 4th wave correction has ended, although I can't say by how much.

by Nassim Nicholas Taleb

Zacks Investment Research gives PG a neutral rating.

Brokers in aggregate come down with a 19% enthusiasm index, with 56% of 16 analysts issuing strong buy recommendations.

Elliott wave announcements provide no timing of events, except in the broadest sense. The 2nd wave of the same level as the current 4th took four days to complete its work. The 4th wave appears to be tracing a triangle, suggesting it will take more time. and won't decline sharply. The triangle suggests that around $86 will be the low point.

I shall first try an iron condor structure.

Iron condor, short the $92.50 calls and long the $95 calls,
short the $85 puts and long the $82.50 puts,
sold for a credit and expiring Oct. 22.
Probability of expiring out-of-the-money


The premium is $0.62, which is 25% of the width of the position’s wings.

The risk/reward ratio is 3:1.

The trade has a profit zone wide enough to meet my reading of the hart. The profit on a theoretical $500 trade falls $14 short per contract of meeting my $200 maximum.

Let's try vertical spread instead. I want it to be a bull put spread, because I expect the next major move to be to the upside.

Bull put spread, short the $85 puts and long the $82.50 puts,
sold for a credit and expiring 
Oct. 22.
Probability of expiring out-of-the-money


The premium is $0.53, which is 21% of the width of the position’s wings.

The risk/reward ratio is 3.7:1.

The shortfall on a hypothetical $500 trade is even greater, at $44.

Decision for My Account

I'm passing on the trade. Neither structure fully meets my risk guidelines.

-- Tim Bovee, Portland, Oregon, Oct. 16, 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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