INTC, SLB: Volatility plays

Update 1/24/2015 and 1/31/2015: INTC and SLB both expired out of the money for maximum profit. My Jan. 24 update and the original analysis had erroneously said that I traded the JAN4 series for SLB. It was the JAN5 series. While INTC expired Jan. 24, SLB expired Jan. 31.

INTC shares gained +0.5% over the nine-day lifespan of the bear position, for a +18.67  annual rate. The options produced a +100% yield on debit, or an annual rate of +4,055.6%.

SLB shares gained +6.0% over the 15-day lifespan of the bear position, for a +137.8%  annual rate. The options produced a +100% yield on debit, or an annual rate of +2,281.3%.

Both trades are fine examples of the hedging benefits provided by options spreads. Although in both cases, the share price moved opposite the direction of my trades, the offset in my break-even point in each case provided a zone of profit above the short-option strike price.

---

The semiconductor giant Intel Corp. (INTC), headquartered in Santa Clara, California, and the supplier of technology for oil and gas exploration and production, Schlumberger N.V. (SLB), headquartered in Houston, Texas, publish earnings after the closing bell on Thursday, Jan. 15. [INTC, SLB in Wikipedia]

Both have Weeklys in their options inventories, and I shall be working with the JAN4 series, whose final day of trading is on Jan. 23, eight days hence.

INTC

Volatility

INTC's implied volatility stands at 32%, in the 81st percentile of the rise from 22% on Nov. 25 to 35% on Dec. 16.

The one standard deviation range surrounding volatility, encompassing 68.2% of trades, implies a potential gain or loss of 4.7% over the next eight days, and the two standard deviation range, covering 95% of trades, a potential gain or loss of 9.5%.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	38.13	39.85	37.16
Lower	34.69	32.97	35.20

Implied volatility 1 and 2 standard deviations; chart support and resistance
The chart shows INTC trading out a decline since Dec. 5, 2014, with the peaks of Dec. 24, 2014 and Jan. 13, 2015 reversing at lower highs, the classic definition of a downtrend.

The broader context is bullish in the form of a rise following a major correction that ended in December 2012.

The Zacks Investment Service rating is bullish, matching the longer-term trend. However, that trend peaked on Dec. 5, 2014.

For a trade of this short a duration, I'll give greater weight to the near-term downtrend, especially given the bearish cast of the general market. (See "Thursday's Prospects" for a count of bull signals vs. bear signals on Wednesday among the 1,197 symbols I'm tracking this week.)

Click on chart to enlarge.

INTC at 9:55 a.m. New York time, 7 months 4-hour bars

The Trade

The lower high on the chart range is my main concern. I want to protect as much of that as I can, without much concern over the additional unprotected portion of the one standard deviation range, which has a higher upper boundary. If the price goes above the chart range, then I called the direction wrong and will take a loss.

Bear call spread, short the $37 calls and long the $38 calls sold for a credit and expiring Jan. 24 Probability of expiring out-of-the-money

JAN4	Strike	%
	37	63.32

The proposed trade has a 7:3 risk/reward ratio and with the premium protects all of the chart range while leaving the top 85 cents of the one standard deviation range with less than full profit.

SLB

Volatility

SLB's standard deviation stands at 43%, in the 76th percentile of the rise fro m26% on Novl 24, 2014 to the 48% peak on Dec. 12, 2014.

The one standard deviation rage suggests a potential gain or loss of 6.3%, and the two standard deviation range, of 12.7%.

SLB then, while at a lower relative percentile, is significantly more volatile than INTC.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	82.86	87.80	88.38
Lower	72.98	68.04	75.60

Implied volatility 1 and 2 standard deviations; chart support and resistance
SLB on the chart has been in a clear downtrend since July 1, 2014. For the range, i've chosen the last major peak as the upper boundary. Given the clarity of the trend, the minor bumps afterward seem insignificant to my eye.

A move above that boundary, $88.38, would signify a clear reversal of the trend; levels below that, would not.

Click on chart to enlarge.

SLB 10:20 a.m. New York time,  180 days 4-hour bars

The Trade

My interpretation means that the chart range covers more real estate than does the one standard deviation range, or even the two standard deviation range. In constructing a range, I'll target the lower one standard deviation range as being the most significant, since the chart range would provide insufficient premium to make the trade worthwhile.

In order to get a better premium I've used the JAN5 series, expiring Jan. 31, for the trade.

Bear call spread, short the $83 calls and long the $84 calls sold for a credit and expiring Jan. 31 Probability of expiring out-of-the-money

JAN5	Strike	%
	83	78.74

The risk reward ratio is 19:6, close to 3:1. The trade covers all of the one standard deviation range, and indeed 34 cents above it. However, it leaves $5.18 of the chart range uncovered.

Decision for My Account

The argument against the INTC trade is inability to determine whether the decline is a countertrend move within a rising stock or the beginning of a downtrend. The near-term bearishness of the general market plays a big role in swinging the argument in favor of a bear play on INTC. I have opened the position, structured as described above.

SLB, by contrast, is an exercise in clarity. The large portion of the chart range left outside of full profitability is an argument against the trade. The strength of the downtrend argues in favor of making the play. I didn't mark it on the chart, but I'll note that a two-day reversal a week ago produced an $83.37 peak on Jan. 9. If I take that lower level as the chart range upper boundary, then only 17 cents is left unprotected. I have opened a position in SLB as described above.

-- Tim Bovee, Portland, Oregon, Jan. 15, 2015

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Thursday's Prospects

On Wednesday, Jan. 14:

Of 1,197 stocks and exchange-traded funds in my analytical universe, 41 broke beyond their 20-day price channels, four to the upside and 37 to the downside.

Two symbols survived initial screening, one having broken out in either direction.

No symbols appearing on my supplemental list of innovative companies gave bull signals and also met my earnings announcement rules.

There are two prospects for trades keyed to earnings under my Volatility Rules.

I shall do further analysis on Thursday, Jan. 15.

The next earnings season began Jan. 12, with the announcement by AA and runs six weeks. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening. The rule doesn't apply to trades under my Volatility Rules.

First-round survivors: Regular rules

The lists are sorted in descending order by average yield. Regular rules means that confirmation will require trading above the 20-day price channel breakout level.

Bull FANG

Bear SDLP

Innovators (bull) (none)

First-round survivors: Special handling

The lists are sorted in descending order by average yield. Rules for a breakout immediately following an earnings announcement require that confirmation on the following trading day, Reset Day, require that the price be beyond the Reset-Day 20-day price channel. A breakout following a stock going ex-dividend must be confirmed on the fifth trading day after ex-dividend day.

Bull earns (none)

Bear earns (none)

Bull ex-div (none)

Bear ex-div (none)

Potential trades under my Volatility Rules, keyed to events

The dates are those of the events, all of them earns announcements. Events prior to the opening bell are marked "am", during the trading day "mid", and after the closing bell "pm". The lists are sorted in descending order by average volume.

Today pm INTC SLB

Tomorrow am (none)

Methodology

The stocks in my analytical universe all have analyst coverage through the stock-ranking company Zacks Investment Research. Not all of the exchange-traded funds are so covered.

I screen the symbols for historical odds of a profitable signal in the direction of the breakout for the past 12 months.

For symbols whose odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options, without yet passing judgment on whether those options are liquid enough to support a trade.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

-- Tim Bovee, Portland, Oregon, Jan. 15, 2015

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter: Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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 decision decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.Tss s ss's

Wednesday's Finalists

DLR with a bull signal and RS with a bear were the finalists among the five survivors of early rounds of analysis under consideration today. Two survivors aren't in play today because they broke out in response to earnings in one case and going ex-divided in the other. See "Wednesday's Prospects" for details.

CDW and PCYC failed confirmation by falling back within their 20-day pride channels, and bear-signal TK showed contrary momentum to the upside.

Of the two finalists, neither will work for the sort of trade that I'm focusing on these days: Vertical option spreads sold for a credit and expiring within a few weeks.

That sort of trade requires high implied volatility relative to the trend, and DLR's is low.

RS has high volatility, but it publishes earnings on Feb. 19, providing a far better opportunity for profit, and it is in my best interest to wait rather than trading now.

One symbol, C, met my criteria for a volatility play keyed to an earnings announcement.

A scheduling conflict this morning had me scrambling, so I broke with my normal practice, analyzing the night before and trading five minutes after the opening bell. Thereafter, I bolted for the door and ran down the chilly predawn streets of Portland, Oregon shouting "SELL! SELL! SELL!" at the top of my lungs as though I were channeling Jim Cramer.

C's price had plummeted at the open, forcing me to reconfigure the trade very quickly. I have just now finished reworking the analysis to conform with what I actually did. See "BAC, C: Volatility plays".

-- Tim Bovee, Portland, Oregon, Jan. 14, 2015

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.


Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

C: Volatility play, update

Note the update to "BAC, C: Volatility plays" I've opened the postion but with changes.

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.


Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Wednesday's Prospects

Note: Due to a scheduling conflict the "Wednesday's Finalists" post will be delayed until late in the trading day.

On Tuesday, Jan. 13:

Of 1,197 stocks and exchange-traded funds in my analytical universe, 35 broke beyond their 20-day price channels, 10 to the upside and 25 to the downside.

Seven symbols survived initial screening, three having broken out to the upside and four to the downside. Two come under special rules, one for a breakout based on an ex-dividend day and another based on an earnings announcement.

No symbols appearing on my supplemental list of innovative companies gave bull signals and also met my earnings announcement rules.

There are two prospects for trades keyed to earnings under my Volatility Rules. See the analysis here.

I shall do further analysis on Wednesday, Jan. 14.

The next earnings season began Jan. 12, with the announcement by AA and runs six weeks. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening. The rule doesn't apply to trades under my Volatility Rules.

First-round survivors: Regular rules

The lists are sorted in descending order by average yield. Regular rules means that confirmation will require trading above the 20-day price channel breakout level.

Bull CDW PCYC DLR

Bear RS TK

Innovators (bull) (none)

First-round survivors: Special handling

The lists are sorted in descending order by average yield. Rules for a breakout immediately following an earnings announcement require that confirmation on the following trading day, Reset Day, require that the price be beyond the Reset-Day 20-day price channel. A breakout following a stock going ex-dividend must be confirmed on the fifth trading day after ex-dividend day.

Bull earns (none)

Bear earns KBH

Bull ex-div (none)

Bear ex-div HSC

Potential trades under my Volatility Rules, keyed to events

The dates are those of the events, all of them earns announcements. Events prior to the opening bell are marked "am", during the trading day "mid", and after the closing bell "pm". The lists are sorted in descending order by average volume.

Today pm (none)

Tomorrow am BAC C

Methodology

The stocks in my analytical universe all have analyst coverage through the stock-ranking company Zacks Investment Research. Not all of the exchange-traded funds are so covered.

I screen the symbols for historical odds of a profitable signal in the direction of the breakout for the past 12 months.

For symbols whose odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options, without yet passing judgment on whether those options are liquid enough to support a trade.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

-- Tim Bovee, Portland, Oregon, Jan. 14, 2015

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter: Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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 decision decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.Tss s ss's

BAC, C: Volatility plays

Update 1/23/2014; I've closed C as it slipped slightly in the on the last trading today before the options expire. 

The shares rose by +1.2% over the nine-day lifespan of the bear position, for an annual rate of +50.2%. The options produced a +34.4% yield on debit, for a +1,394.1% annual rate.

---

Update 1/14/2015: I've updated the C portion of the post, including the chart, with the trade I actually took.

---

Update 1/14/2015: I've opened a position in C. A price decline required me to restructure the trade as long the $49 call and short the $50 call. I'll update with details later in the trading day.

Note: Due to a scheduling conflict, I am doing this analysis prior to Wednesday's opening bell. I shall place any trades based on the analysis immediately after the opening.

---

Two large banks, Bank of America Corp. (BAC), headquartered in Charlotte, North Carolina, and Citigroup Inc. (C), headquartered in New York City, publish earnings Thursday prior to the opening bell. [BAC, C in Wikipedia]

Both have Weeklys in their options inventory, and I shall be working with the JAN4 series, which expires nine days hence.

BAC

Volatility

Implied volatility stands at 29%, in the 68th percentile of the rise from 18% on Nov. 24, 2014 to 34% on Dec. 16, 2014. The December peak was followed by a steep fall and an upside retracement that fell short of setting a higher high. It has since resumed movement to the downside.

The one standard deviation range surrounding the current implied volatility and encompassing 68.2% of trades suggests a potential gain or loss of 4.5% between Wednesday and the expiration of the JAN4 series on Jan. 26, and the two standard deviation range, covering 95% of trades, a gain or loss of 9.0%.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	17.19	17.93	17.38
Lower	15.71	14.97	16.32

Implied volatility 1 and 2 standard deviations; chart support and resistance
BAC has been on a rise since Dec. 2011 as part of an upside retracement from the 2009 Great Recession low. It is near resistance at the peak of the first wave up from that low and has tested the upside twice in what could be interpreted as the beginning of another trip to the cellar.

Near term, the price began a sharp decline from Dec. 31 and hit a fresh low on Tuesday. I've used that low as the lower boundary of the chart range and an interim retracement peak within the larger decline from January as the upper boundary.

The trend is clearly to the downside.

Click on chart to enlarge.

BAC 30 days hourly bars

The Trade

Bear call spread, short the $17 calls and long the $18 calls sold for a credit and expiring Jan. 26 Probability of expiring out-of-the-money

JAN4	Strike	ITM
	17	74.17%

Because of the low share price, BAC's options grid provides a low credit, which requires more contracts to make the trade worthwhile and therefore increases the cost of the trade.

The low price also increases the impact of the 50 cent spread between strikes, so that the odds of expiring in-the-money for maximum profit drops for 74% when short the $17 strike to 54% when short  the $16.50 strike. I always want to have at least a 60% chance of expiring ITM.

The impact of the relatively high ITM chance is a high risk/reward ratio of 8:1. My preferences allow a maximum of 4:1.

The proposed trade above covers most of the one standard deviation range and the chart range.

C

Volatility

C's implied volatility stands at 34%, in the 100th percentile of the rise from 18% on Nov. 13, 2014 to 33% on Jan. 7. The form of the implied volatility trace is similar to BAC's -- big rise, big decline and a fresh rise. The difference is that C's fresh rise attained a higher high. In terms of my form preference, C's is superior.

The one standard deviation range implies a potential gain or loss of 5.4%, and the two standard deviation range, a gain or loss of 10.8%.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	51.12	53.72	51.23
Lower	45.90	43.30	48.51

Implied volatility 1 and 2 standard deviations; chart support and resistance
C's chart showed a precipitous drop from 2006 to 2009 and has since traced a meandering sideways path. The price is presently at the upper end of the range, having pulled back from a a December peak that pushed out the upper range of the sideways trend.

Click on chart to enlarge.

C 30 days hourly bars, snapshot at ~1:15 p.m. New York time

The decline from that peak has traced out a series of distinct waves, with the trace presently in the 3rd wave down. The most recent low, $47.86, is above the $45.18 lower boundary that has contained the movement since 2011. Wednesday's precipitous price drop has brought that level within easy range.

The most recent step of the decline is contained entirely in two days, Jan. 13-14 -- a peak and a decline. An alternate upper boundary of the chart range would be the Jan. 9 peak of $52.24.

In either case, the C chart is in a downtrend.

The Trade

Bear call spread, short the $49 calls and long the $50 calls sold for a credit and expiring Jan. 26 Probability of expiring out-of-the-money

JAN4	Strike	ITM
	49	~65%

The best coverage the options grid for C will leaves 3.7% of the chart range and 3.5% of the one standard deviation range unprotected in case of a reversal to the upside.

I did not capture the likelihood of the position expiring in the money for maximum profit, but I recall it as being about 65%, which is acceptable. is acceptable, as is the 27:10 (slightly under 3:1) risk/reward ratio.

Decision for My Account

The proposed trade for BAC has an unacceptable risk/reward ratio and I shall not open a position.

The proposed trade for C is acceptable and I opened a position as described above five minutes after the opening bell on Jan. 14.

-- Tim Bovee, Portland, Oregon, Jan. 13-14, 2015

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

JPM Reconsidered: Volatility play

Update 1/17/2015: My short options spreads expired out-the-money and so without value, providing maximum profit.

During the three-day lifespan of the position, shares declined by -5.1%, for an -52.1% annual rate.

The options produced a 100% yield on debit, or a 1,013.9% annual rate.

---

Note: Earlier in the market session I published an analysis of JPM as a volatility play keyed to the earnings announcement but rejected the trade because of ambiguity about the trend. The price has reversed to the downside, making it possible to construct a trade, and I have opened a position. Here is the revised analysis. See the original at "JPM: Volatility play".

The investment banker and financial services company JPMorgan Chase & Co. (JPM), headquartered in Midtown Manhattan in New York City, publishes earnings on Tuesday prior to the opening bell. [JPM in Wikipedia]

Two other symbols, CSX and WFC, met the liquidity requirements for consideration but failed because their implied volatility was low relative to its most recent range, below the 60th percentile.

JPM

Volatility

Implied volatility stands at 28%, placing it in the 67th percentile of the rise from 23% on Dec. 26, 2014 to 31% on Jan. 6.

The one standard deviation range from the current implied volatility, encompassing 68.2% of trades, suggests a potential gain or loss of 2.6% in the next three days, until options expire, and the two standard deviation range, covering 95% of trades, of 5.1%.


Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	60.19	61.69	60.79
Lower	57.19	55.69	58.27

Implied volatility 1 and 2 standard deviations; chart support and resistance
Elliott wave analysis of the longer-term chart, on the left, shows JPM within a mature 3rd wave of a rise from October 2011. The internal count of wave 3 is poorly differentiated. However, the form of the wave suggests a slowing of the rise preparatory to a reversal. However, JPM will not have swung into a definitive downtrend until the price drops below $54.02, or arguably, the slightly earlier low of $51.44.

Click on chart to enlarge.

JPM 4 years 2-day bars (left) 90 days 4-hour bars (right)

The decline from the Jan. 9 peak of $60.79 shows  JPM traced an upward retracement from Monday into this morning that has carried the price more than 2% above the decline's low, $59.27. The retracement reversed in afternoon trading

The primary and immediate trends are both clearly down.

The Trade

Although JPM has liquid Weeklys in its options inventory, I decided to work with the monthly JAN series, which will trade for the last time on Jan. 16, three days hence. This gave me better metrics for the trade.

It is a risk in that it comes close to turning the trade into a lottery ticket. If the price moves in my favor then I win; if against, I lose, with only a very limited opportunity to mitigate the result.

Bear call spread, short the $59 calls and long the $60 calls sold for a credit and expiring Jan. 16 Probability of expiring out-of-the-money

JAN	Strike	%
	59	71.84

Decision for My Account

The risk/reward ratio is 8:5, with a 71.84% chance of expiring in the money for maximum profits. Good odds for a lottery ticket!

I have opened the position as described above.

-- Tim Bovee, Portland, Oregon, Jan. 13, 2015

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Tuesday's Finalists

Two symbols, RIG and LO, from among the six survivors of the early rounds of analysis (see "Tuesday's Prospects") made it to the finals.

Of the others, TD and DNOW confirmed their signals but then showed momentum in the opposite direction, and PCLN and GNRC failed confirmation by moving back within their 20-day price channels.

LO has relatively low implied volatility, making it unsuitable for the kind of higher velocity trades that I'm looking for these days. RIG has the volatility, but it announces earnings on Feb. 25. My chances of making a profit if I trade around earnings is far greater than if I trade now, so I'm inclined to wait.

Bottom line: No trade based on Monday's markets.

-- Tim Bovee, Portland, Oregon, Jan. 13, 2015

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.


Alerts

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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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

JPM: Volatility play

Note: This analysis has been superceded by "JPM Reconsidered: Volatility play". The stock price reversed, and so did my decision.

The investment banker and financial services company JPMorgan Chase & Co. (JPM), headquartered in Midtown Manhattan in New York City, publishes earnings on Tuesday prior to the opening bell. [JPM in Wikipedia]

Two other symbols, CSX and WFC, met the liquidity requirements for consideration but failed because their implied volatility was low relative to its most recent range, below the 60th percentile.

JPM

Volatility

Implied volatility stands at 28%, placing it in the 65th percentile of the rise from 23% on Dec. 26l 2014 to 31% on Jan. 6.

The one standard deviation range from the current implied volatility, encompassing 68.2% of trades, suggests a potential gain or loss of 4.8% in the next 10 days, until options expire, and the two standard deviation range, covering 95% of trades, of 9.28%.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	54.78	57.21	60.79
Lower	49.92	47.49	58.27

Implied volatility 1 and 2 standard deviations; chart support and resistance
Elliott wave analysis of the longer-term chart, on the left, shows JPM within a mature 3rd wave of a rise from October 2011. The internal count of wave 3 is poorly differentiated. However, the form of the wave suggests a slowing of the rise preparatory to a reversal. However, JPM will not have swung into a downtrend until the price drops below $54.02, or arguably, the slightly earlier low of $51.44.

Click on chart to enlarge.

JPM 4 years 2-day bars (left), 90 days 4-hour bars (right)

The decline from the Jan. 9 peak of $60.79 shows  JPM in an upward retracement since Monday that has carried the price 2% above the decline's low, $59.27.

The primary trend is clearly down. The immediate trend is up. I must judge the direction for JPM to be ambiguous. The rating from Zacks Investment Research is neutral, providing no real guidance.

Earnings over the past year have all produced immediate upward movements. Given the fact that the macro-trend from 2011 is up, and the heavily weighted immediate trend is also up, my inclination is to construct a bull play.

The Trade

JPM has liquid Weeklys in its options inventory, so I shall work with the JAN4 series, which trade for the last time on Jan. 23, 10 days hence.

The standard deviation ranges are skewed to the downside. With this options grid, the skewing forces me to leave much of the 1SD range unprotected in a bull play. And indeed, the grid forces me to pick a low probability strike price in order to get an acceptable risk/reward ratio.

Bull put spread, short the $59.50 puts and long the $58.50 puts sold for credit and expiring Jan. 23 Probability of expiring out-of-the-money

JAN4	Strike	%
	59.5	50.94

The risk/reward ratio of the proposed trade is 19:10, or very close to a 2:1 ratio, compared to the 3:1 or 4:1 that I usually end up with. However, the chance of expiring in the money for maximum profit is nearly 50% -- even odds.

Decision for My Account: SUPERCEDED, see the note at the top of this analysis

There is a correlation among the risk/reward and the odds of expiring in the money for maximum profit -- the lower the risk, the lower the likelihood of a profit. This proposed trade leaves 27% of the chart range unprotected, and 19.9% of the one standard deviation range.

If the chart had a strong presumption of an upward move I would take the trade. But it doesn't. The decline up until yesterday weakens the impact of the one-day rise and leaves me awash in uncertainty over the trend.

Given that degree of uncertainty and then inability to construct a reasonable hedge on the options grid, I've decided against taking the trade.

-- Tim Bovee, Portland, Oregon, Jan. 13, 2015

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Tuesday's Prospects

On Monday, Jan. 12:

Of 1,197 stocks and exchange-traded funds in my analytical universe, 46 broke beyond their 20-day price channels, 14 to the upside and 32 to the downside.

Six symbols survived initial screening, one having broken out to the upside and five to the downside.

No symbols appearing on my supplemental list of innovative companies gave bull signals and also met my earnings announcement rules.

There is one prospect for trades keyed to earnings under my Volatility Rules.

I shall do further analysis on Tuesday, Jan. 13.

The next earnings season began Jan. 12, with the announcement by AA and runs six weeks. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening. The rule doesn't apply to trades under my Volatility Rules.

First-round survivors: Regular rules

The lists are sorted in descending order by average yield. Regular rules means that confirmation will require trading above the 20-day price channel breakout level.

Bull LO

Bear RIG TD PCLN GNRC DNOW

Innovators (bull) (none)

First-round survivors: Special handling

The lists are sorted in descending order by average yield. Rules for a breakout immediately following an earnings announcement require that confirmation on the following trading day, Reset Day, require that the price be beyond the Reset-Day 20-day price channel. A breakout following a stock going ex-dividend must be confirmed on the fifth trading day after ex-dividend day.

Bull earns (none)

Bear earns (none)

Bull ex-div (none)

Bear ex-div (none)

Potential trades under my Volatility Rules, keyed to events

The dates are those of the events, all of them earns announcements. Events prior to the opening bell are marked "am", during the trading day "mid", and after the closing bell "pm". The lists are sorted in descending order by average volume.

Today pm (none)

Tomorrow am JPM

Methodology

The stocks in my analytical universe all have analyst coverage through the stock-ranking company Zacks Investment Research. Not all of the exchange-traded funds are so covered.

I screen the symbols for historical odds of a profitable signal in the direction of the breakout for the past 12 months.

For symbols whose odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options, without yet passing judgment on whether those options are liquid enough to support a trade.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

-- Tim Bovee, Portland, Oregon, Jan. 13, 2015

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter: Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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 decision decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.Tss s ss's

Monday's Outcomes

I closed my bull position on BBBY, which was keyed to the earnings announcement. The last trading day for the options is Friday. See my update to the Jan. 8 post "BBBY: Volatility play", with a results, insight into odds of the trade becoming profitable before expiration, and a "lessons learned" discussion.

I analyzed two symbols as potential very short-term trades keyed to earnings announcements but declined to take them both. See today's analysis at "AA, KBH: Volatility plays".

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.

Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Monday's Finalists

All four symbols that survived the early rounds of analysis (see "Monday's Prospects") have failed to make the finals.

CXP failed confirmation, moving back within its 20-day price channel, and XON, while confirming, moved sharply contrary to its bull signal, showing a disqualifying lack of momentum.

Two failed because of very wide bid/ask spreads on the front-month at-the-money options: TEX at 12.5% and BMO at 34%. I require single-digit spreads.

Turning to my two bull signals from the innovative companies list, both TWTR and YELP are within 30 days of their earnings announcements, disqualifying them under my shorter-term and longer-term rules. Both will come up for consideration the day before their earnings announcements under my volatility rules.

YELP also failed confirmation, also disqualifying.

I shall make no trades based on signals from Friday's markets.

I analyzed AA and KBH as volatility plays (see the analysis here), but neither passed muster.

-- Tim Bovee, Portland, Oregon, Jan. 12, 2015

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.


Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

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



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.