IBM Analysis

International Business Machines Corp. (IBM)

I have passed on a short iron fly spread on IBM, using options that trade for the last time 14 days hence, on Jan. 26. The premium in the proposed position was a $3.00 credit.

I declined the trades because of  large skew toward the put side that raised the risk/reward ratio to 4:1, an unacceptable level for an iron fly.

The profit zone for this position would have been between $168 on the upside and $153 on the downside.

IBM publishes earnings on Jan. 18 after the closing bell.


Implied volatility stands at 27%, which is 2.7 times the VIX, a measure of the volatility of the S&P 500 index.

IBM’s IV stands at the peak of its annual range and its most recent broad movement.

The price used for analysis was $164.41.

Premium: $3.00 Expire OTM
IBM-iron fly Strike Odds Delta
Calls
Long 180.00 91.6% 10
Break-even 168.00 65.0% 38
Short 165.00 54.9% 47
Puts
Short 165.00 44.9% 53
Break-even 153.00 84.0% 12
Long 150.00 90.4% 9

The premium is 20% of the width of the position’s wings.

The risk/reward ratio is 4:1.

The zone of profit in the proposed trade covers a $3 move to the upside and a $12 move to the downside. The biggest immediate move after each of the past four earnings announcements was $12.99, and the average was $6.81. After eliminating the maximum and minimum post-earnings movements, the central tendency is $5.26.

Over the past four earnings announcements the price has twice closed the first post-earns session higher than the pre-earns close.

The break-even probabilities applied to the past four post-earnings moves show a 32.5% probability of the price rising while contained within the boundaries of the profit zone and a 42.0% probability of it falling while remaining profitable

Options analysis puts the expected move covering 85% of occurrences at $07.32, within the profit zone the downside but not to the upside.

The bid/ask spread was 9.9%.

Decision for my account: No trade.

By Tim Bovee, Portland, Oregon, Jan. 12, 2018

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
Creative Commons 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.

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