IBM Analysis

International Business Machines Corp. (IBM)

Note: This trade was based on a hypothetical study aimed at allowing hedged trading of earnings announcements. To ensure I had an accurate fill price, I converted the hypothetical high-risk portion of the hedge to an actual trade, which I placed on Wednesday.

Update 7/18/2019As my experimental rules require, I have exited my short iron fly earnings play on IBM. As the closing bell approaches, it is trading beyond its zone of profitability. The implied volatility rank declined by 11 points to 42%.

IBM published earnings on July 17, swung wildly in the overnight trading, and then, after opening within the profit zone, swiftly rose to above the zone. The way I structured the trade, my maximum loss was $81 per contract. I got out for a $3.92 debit, producing a $79 loss per contract, $2 below the max. Shares at the exit were trading at $149.34, up $6.82 from their entry level.

Shares rose by 4.8% over one day, or a +1,747% annual rate. The options position produced a -20.2% loss for a -7,356% annual rate.

Update 7/18/2019IBM published earnings after the closing bell on July 17, beating the street estimate by 9.2 cents for a quarterly result of $3.17 per share. The market had closed pre-earnings at $143, the short strike price of my iron fly. After the earnings announcement, the price almost instantly rose in after-hours trading to $149, quickly fell to $140.34, and then bounced, settling between $141 and $142. After the opening bell the price rose sharply again and as of 9:55 a.m. New York time was trading at $147.53, a dollar above the profit zone. The implied volatility rank stands more than three points of where it was before earnings.

As set out in the hypothetical study, the idea was for this high-risk trade to be paired with a low-risk trade expiring on August 16. The low-risk position, described in the hypothetical study, has a profit range running from $150.88 to $120.88 and had I made such a trade, would remain profitable with quite a large margin to spare.

On July 17 I entered a short iron fly spread on IBM, using options that trade for the last time two days hence, on July 19. The premium is a $3.13 credit and the stock at the time of entry was priced at $142.52.

The profit zone for this position is between $146.13 on the upside and $142.13 on the downside.

The implied volatility rank (IVR) stands at 53.

IBM publishes earnings after the closing bell the day of entry into the position.

Premium: $3.13 Expire OTM
IBM-iron fly Strike Odds Delta
Long 147.00 69.1% 33
Break-even 146.13 59.6% 42.8
Short 143.00 50.0% 52.6
Short 143.00 50.0% 47.4
Break-even 142.13 59.0% 38.7
Long 139.00 67.9% 30

The premium is 78.3% of the width of the position’s wings.

The risk/reward ratio is 0.3:1, with a maximum risk of $81 per contract and a maximum reward of $313 per contract.

By Tim Bovee, Portland, Oregon, July 17, 2019


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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