SPX Analysis

S&P 500 Index (SPX)

Update 1/5/2017SPX rose rapidly after I entered the position, eventually resolving into a series of broad sideways swings. I exited for a loss as expiration approached to avoid assignment, which would have been a problem for my account, given SPX’s high share price.

Shares rose by 2.9% over 36 days, or a 29% annual rate. The options position produced a 24.5% loss on debit for a -248% annual rate.

This iron condor trading idea and structure come from trader Fauzia at Dough
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TLT Analysis

iShares Barclays 20+ Year Teasury Bond ETF (TLT)

Update 12/22/2016: TLT spent the time I held it toying with the lower boundary of profitability. With expiration eight days away and the low liquidity winter holidays season rapidly approaching, I exited for a smaller profit that was my goal, which is 25% of the potential maxim.

But in a world where 10-year government bonds pay 2.6% a year, a return of 9.5% of maximum is still a significant gain for three weeks, so I have no complaints.

Shares fell by 2.9% over 23 days, or a -5% annual rate. The options position produced a +10.5% yield on debit for a +166% annual rate.


The trading idea came from Fauzia at Dough. I’ve never seen an iron condor structured this way, with a identical shorts on both calls and puts, with extremely wide wings. It’s basically a straddle with defined risk. Most iron condors are strangles with risk defined.

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EWZ Analysis

iShares MSCI Brazil Index (EWZ)

Update 12/15/2016: EWZ remained unprofitable for much of its holding period. I exited a few days prior to expiration.

Shares declined by 7.7% over 17 days, or a -166% annual rate. The options position produced a 50.0% loss on debit for a -1,1074% annual rate


 

The trading idea comes of Ryan at Dough, who earned a 1.60 credit. The position diverges from my guidelines in that expiration is less than 30 days away. The implied volatility is also lower than my 50th percentile requirement. The width of iron condor is also narrower than what I usually allow. Let’s see how it works.

I shall use the DEC series of options, which trades for the last time 18 days hence, on Dec. 17.

Implied volatility stands at 38%, which is in the 31st percentile of its annual range. The price used for analysis was $34.07.

Iron condor, short the $34 calls and long the $36.50 calls,
short the $34 puts and long the $31.50 puts,
sold for a credit and expiring Dec. 17.
Probability of expiring out-of-the-money

DEC Strike OTM Δ
Upper 34 77.8% 52
Lower 31.5 82.6% 25

The premium is $1.61, which is 64% of the width of the position’s wings.

The risk/reward ratio is 0.6:1.

Decision for My Account

I have placed an order on EWZ as described above. The stock price at entry was $34.06,

Tim Bovee, Portland, Oregon, Nov. 28, 2016

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TSN Analysis

Update 12/12/2016: TSN gapped downward sharply after earnings were published but in subsequent weeks recovered about half of the loss. I exited with a profit.


Shares declined by 6.5% over 24 days, or a -99% annual rate. The options position produced a 113.5% yield on debit for a +1,728% annual rate.


The chicken, beef and pork processing company Tyson Foods Inc. (TSN), headquartered in Springdale, Arkansas, publishes earnings on Monday before the opening bell.

[TSN in Wikipedia]

 

TSN

I shall use the JAN series of options, which trades for the last time 63 days hence, on Jan. 20.

Ranges

Implied volatility stands at 44%, which is 3.4 times the VIX, a measure of volatility of the S&P 500 index. TSN’s volatility stands in the 95th percentile of its annual range. The price used for analysis was $67.17.

Ranges implied by options and earnings

Week SD1 68.2% SD2 95% Earns
Upper 79.48 91.78 70.90
Lower 54.86 42.56 63.45
Gain/loss ±$12.31 ±$24.61 ±$3.73

Implied volatility 1 and 2 standard deviations; central tendency earns moveThe Trade

TSN peaked Sept. 5 and then reversed downward, ending a rise lasting nearly eight years. The Elliott wave count suggests that the present move to the downside is the beginning of a major correction, but it is not a certainty.

The price since September is in the fifth wave of its decline, suggesting that a reversal to the upside is near. Such a reversal would be a counter-trend correction, and I would expect it to stay well below the September peak.

Zacks Investment Research gives TSN a neutral rating, with some suggestion in recent analysts’ alterations of their assessments that a negative earnings surprise is expected.

TSN’s brokerage coverage is slim, but in aggregate they come down with a 33% enthusiasm rating, with two thirds of six analysts issuing strong buy recommendations.

The stock’s price has risen in the trading session after three of the last four earnings announcements.

I’ll construct a direction neutral trade skewed to the downside.

Iron condor, short the $72.50 calls and long the $75 calls,
short the $57.50 puts and long the $55 puts,
sold for a credit and expiring Jan. 21.
Probability of expiring out-of-the-money

JAN Strike OTM
Upper 72.50 74.3%
Lower 57.50 80.6%

The premium is $0.79, which is 32% of the width of the position’s wings.

The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $5.15, and the average was $3.26. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.73.

Decision for My Account

I have entered a position on TSM as described above. The stock at the time of entry was priced at $67.22.

— Tim Bovee, Portland, Oregon, Nov. 18, 2016

References


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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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.

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Based on a work at www.timbovee.com.