IBM Analysis

Update 10/20/2015: IBM gapped downward by ore than 5% after earnings were published, bringing profits to 75% of their maximum potential. I exited the position, avoiding further time risk and freeing funds for futures trades.

Shares declined by 5.4% over one day, or a -1,973% annual rate. The options position produced a 306.1% yield on debit, for +111,735% annual rate.

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The 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 DEC series of options, which trades for the last time 60 days hence, on Dec. 18.

Ranges

Implied volatility stands at 27%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. IBM’s volatility stands in the 59th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	164.99	181.07	161.87
Lower	132.85	116.87	135.97
Gain/loss	10.8%	21.6%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

My opinion of IBM is bearish, based on analyst expectations and the strong tendency of earnings announcements over the past year to produced price declines. I'll structure the position as a bear vertical.
Bear call spread, short the $150 calls and long the $155 calls,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	150	58.1%

The premium is $1.99, which is 40% of the width of the position’s wing. The stock at the time of purchase was priced at $148.94.

The risk/reward ratio is 1.5:1.

The short strike stands $1.06 above the entry price. The biggest immediate move after each of the past four earnings announcements was $12.95, and the average was $6.30.

Decision for My Account

I've opened a position on IBM as described above.

-- Tim Bovee, Portland, Oregon, Oct. 19, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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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.