IBM Analysis

International Business Machines Corp. (IBM)

Update 1/10/2017: IBM rose to the upper boundary of its profit zone and there it stayed, fluctuating from a winning to a losing position as the stock price traded within a very narrow range. I picked a point of exit where I could get out with a profit, although a small one.

Shares rose by 0.7 over 33 days, or a +8% annual rate. The options position produced a 6.3% yield on debit for a +70% annual rate.

This volatility play was initially crafted by Dough trader Fauzia. It breaks with my usual practice in several ways. The short call is at the money. The stock is within 60 days of earnings (on Jan. 19). Implied volatility is below the 50th percentile of the annual range.

I shall use the JAN series of options, which trades for the last time 43 days hence, on Jan. 20.

Implied volatility stands at 33%, which stands in the 32 percentile of its annual range and in the 53rd percentile of its most recent broad move. The price used for analysis was $165.70.

Iron condor, short the $165 calls and long the $175 calls,

short the $160 puts and long the $150 puts,

sold for a credit and expiring Jan. 21.

Probability of expiring out-of-the-money

JAN Strike OTM Δ
Upper 165 50.4% 53
Lower 160 67% 30

The premium is $5.20, which is 52% of the width of the position’s wings.

The risk/reward ratio is 0.9:1.

Decision for My Account

I have entered a position on IBM as described above. The stock at the time of entry was priced at $165.61.

Tim Bovee, Portland, Oregon, Dec. 8, 2016

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