Update 11/2/2022: I exited my short bull put vertical spread on IBM, two days before expiration, for a $2.04 debit per contract/share, a loss before fees of $108 per contract. Shares were trading at $137.26, up $13.43 from the entry level.
The Implied Volatility Rank at exit was 22.8%, down 47.3 points from the entry level.
I exited on as the expiration date approached because the position seemed unlikely to ever recover in the short time left to it. I had the choice of holding the options, thereby letting them be exchanged at expiry for 100 short shares of IBM per contract or exercised a bit earlier, or of buying back the contract at a high price, 196% of maximum potential profit, avoiding fees and paperwork while taking a hefty hit but also freeing up funds for other work. The position lasted two weeks. The explanation is clear: The metrics pointed toward a negative earnings surprise. The company instead came in with an earnings and revenues surprise.
Shares rose by 10.8% over 14 days for a +283% annual rate. The options position produced a 52.9% loss for a -1,380% annual rate.
I have entered a short bear call vertical spread on IBM, using options that trade for the last time 16 days hence, on November 4. The premium is a $0.96 credit per contract share and the stock at the time of entry was priced at $123.83.
The Implied Volatility Ratio stood at 70.1%.
|IBM-bear call spread||Strike||Odds||Delta|
The premium is 96% of the width of the position’s short/long spread. The profit zone covers a 0.9% move to the downside and an unlimited move to the upside.
The risk/reward ratio is 1.1:1, with maximum risk of $104 and maximum reward of $96 per contract.
How I chose the trade. The trade was placed to coincide with IBM’s earnings announcement, after the closing bell on the day of entry. The short strike was set to coincide with the expected move of $2.13 either way, based on options pricing, which gives a price range of $121.70 to $125.96. The Zacks Investment Research earnings surprise predictor gave IBM a score of -5.41%, with a rank of 4 (sell). The analysts’ consensus is that IBM will announce earnings of $1.78 per share.
By Tim Bovee, Portland, Oregon, October 19, 2022
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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