GIS Analysis

General Mills Inc. (GIS)

GIS publishes earnings on Tuesday before the opening bell.

Update 12/27/2016: GIS dropped after earnings were published but recovered to near the strike price within a few days. I exited at 25% of maximum profit, my standard goal for positions of this sort.

Shares declined by 1.2% over eight days, or a -56% annual rate. The options position produced a 29.34% yield on debit for a +1,339% annual rate.

I shall use the JAN series of options, which trades for the last time 32 days hence, on Jan. 20.

Implied volatility stands at 27%, or 2.3 times the VIX, a measure of volatility on the S&P 500. Volatility is in the 80th percentile of its annual range and at the peak of its most recent broad move. The price used for analysis was $63.00.

Iron fly, short the $62.50 calls and long the $67.50 calls,

short the $62.50 puts and long the $57.50 puts,

sold for a credit and expiring Jan. 21.

Probability of expiring out-of-the-money

JAN Strike OTM Δ
Calls 62.50 47.3% 55
Puts 62.50 52.1% 45

The premium is $2.68, which is 53% of the width of the position’s wings.

The risk/reward ratio is 0.8:1.

Decision for My Account

I have entered a position on GIS as described above.  The stock at the time of entry was priced at $63.03.

— Tim Bovee, Portland, Oregon, Dec. 19, 2016

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