PAA Analysis

Plains All American Pipeline LP (PAA)

PAA publishes earnings on Monday after the closing bell.

I shall use the series of weekly options that trade for the last time 11 days hence, on May 19.

Implied volatility stands at 28%, which is 2.8 times the VIX, a measure of the volatility of the S&P 500 index.

PAA’s IV stands in the 28th percentile of its annual range and the 76th percentile of its most recent broad movement.

The price used for analysis was $28.44.

Premium: $0.70 Expire OTM  
PAA-iron condor Strike Odds Delta
Long 31.00 93.7% 7
Break-even 29.70
Short 29.00 63.4% 37
Short 28.00 59.3% 38
Break-even 26.70
Long 26.00 90.0% 8

I chose the iron condor structure (with a gap between the short strikes) because there was no identical call/put strike with deltas of near 50. That gap inevitably raises the risk.

The premium is 35% of the width of the position’s wings.

The risk/reward ratio is 1.9:1.

Decision for My Account

I am passing on the trade. The high risk compared to reward makes it less attractive for a short-term play such as this.

By Tim Bovee, Portland, Oregon, May 8, 2017

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