IBM Analysis

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

[IBM in Wikipedia]

IBM

I shall use the FEB series of options, which trades for the last time 31 days hence, on Feb. 20.

Ranges

Implied volatility stands at 34%, which is 1.3 times the VIX, a measure of volatility of the S&P 500 index. IBM’s volatility stands in the 94th percentile of its most recent range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	143.39	156.31	156.33
Lower	117.53	104.61	105.13
Gain/loss	9.9%	19.8%

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

IBM has been in a downtrend since March 2013.

Brokerages collectively come down with a negative 11% enthusiasm index, but with 42% of 19 analysts giving a strong buy recommendation.

Two out of the last four earnings announcements have resulted in price rises the next trading day.

I shall hedge my position both to the upside and the downside. Given the open-interest distribition  on the current options grid, I've forced to probabilities in the mid-80s with $10 wings to approach the 30% guideline on the premium. It looks like this:

Iron condor, short the $140 calls and long the $150 calls,
short the $115 puts and long the $150 puts,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money

FEB	Strike	OTM
Upper	140	83.6%
Lower	115	85.0%

The premium is $1.44, which is 29% of the width of the position’s wings. The stock at the time of analysis was priced at $130.46.

The risk/reward ratio is 5.9:1.

The zone of profit in the proposed trade covers a $12.50 move either way. The biggest immediate move after each of the past four earnings announcements was $25.10, and the average was $10.97. The central tendency, after the maximum and minimum movements are removed, was $7.86

Decision for My Account

I am passing on this trade. The risk/reward ratio is way too high. My maximum allowable risk/reward ratio is 4:1.

-- Tim Bovee, Portland, Oregon, Jan. 19, 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



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Based on a work at www.timbovee.com.