Wednesday, September 14, 2016

IBM Analysis

Update 10/13/2016: IBM reached 48.1% of its potential profit as options expiration neared and I exited.

Shares declined by -1.5% over 29 days, or a -19% annual rate. The options position produced a +92.7% yield on debit for a +1,166% annual rate.

The information technology com pany International Business Machines Corp. (IBM), headquartered in Armonk, New York, has implied volatility in the upper half of its one-year range and qualifies for a full analysis.

[IBM in Wikipedia]


I shall use the OCT series of options, which trades for the last time 37 days hence, on Oct. 21.


Implied volatility stands at 26%, which is 1.6 times the VIX, a measure of volatility of the S&P 500 index. IBM’s volatility stands in the 50th percentile of its annual range. The price used for analysis was $155.18.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Trade

IBM has been in a downtrend since 2013 and is presently off the peak of a rising correction that began on July 27.

The Art of Risk: The New Science of Courage, Caution, and Chance
by Kayt Sukei

It has a neutral rank from Zacks Investment Research.

Brokerages in aggregate give IBM a negative 44% enthusiasm index with 22% of 18 analysts issuing strong buy recommendations.

On balance, IBM looks mildly bearish to me, and I shall use a bear all spread for the trade.
Bear call spread, short the $160 calls and long the $165 calls,
sold for a credit and expiring 
Oct. 22.
Probability of expiring out-of-the-money


The premium is $1.31, which is 27% of the width of the position’s wings. The stock at the time of entry was priced at $155.01.

The risk/reward ratio is 2.9:1.

The zone of profit in the trade covers a $4.99  move above the strike price.

Decision for My Account

I have entered a position on IBM as described above.

-- Tim Bovee, Portland, Oregon, Oct. 14, 2016


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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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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