IBM Analysis

Update 4/20/2016: IBM gapped sharply to the downside after its earnings announcement. Earnings beat the Street estimate, but revenues were lower than expected.

Shares declined by 5.1% over two days, or a -935% annual rate. The options position produced a 54.3% loss on debit for a -9,907% annual rate.

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The information technology company International Business Machines Corp. (IBM), headquartered in Armonk, New York, publishes earnings on Monday after the closing bell.

[IBM in Wikipedia]

IBM

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

Ranges

Implied volatility stands at 28%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. IBM’s volatility stands in the 68th percentile of its most recent range. The price used for analysis was $152.83.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	165.52	178.22	159.52
Lower	140.14	127.44	146.15
Gain/loss	±$12.69	±$25.39	±$6.69

Implied volatility 1 and 2 standard deviations; central tendency earns move

A book from my library →

The Trade

IBM reached an all-time high in May 2013 and began a staged decline, marking its most recent low on Feb. 11. The price subsequently rose but remains well below the interim high of its most recent leg down.

The share price rose once in the first trading session following each of the last four trading sessions.

Brokerages in aggregate give IBM a negative 25% enthusiasm rating, with 35% of 16 analysts issuing strong buy recommendations.

The chart is bullish since February and remains so, despite the faltering of recent weeks. The bull case is bolster by brokerage opinion. The bearish record on price rises post-earnings was set during the downtrend that ended in February. conditions have since changed.
Bull put spread, short the $150 puts and long the $145 puts,
sold for a credit and expiring May 21.
Probability of expiring out-of-the-money

MAY	Strike	OTM
	150	57.1%

The premium is $1.60, which is 32% of the width of the position’s wings. The stock at the time of entry was priced at $152.65.

The risk/reward ratio is 1.1:1.

The zone of profit in the proposed trade covers a $2.65 move to the downside and all moves to the upside. The biggest immediate move after each of the past four earnings announcements was $8.58, and the average was $6.26. After eliminating the maximum and minimum post-earnings movements, the core tendency is $6.69.

Decision for My Account

I have opened a position on IBM as described above.

-- Tim Bovee, Portland, Oregon, April 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.

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.