What are your options - IBM earnings What are your options - IBM earnings What are your options - IBM earnings

What are your options - IBM earnings

Koen Hoorelbeke

Options Strategist

Summary:  Earnings season is in full swing, and IBM is among the big names today. This article provides three potential trade setups - bullish, neutral, and bearish - for IBM's earnings release on July 19th, 2023.


What are your options - IBM Earnings


On Wednesday, July 19th, 2023, IBM is set to release its earnings report after the market closes. In this article, we will discuss three potential trade setups: one bullish, one neutral, and one bearish. These setups are designed to help traders navigate the potential market reactions to IBM's earnings release. Our aim is to provide clear, objective insights that can assist in making informed trading decisions.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.


1. Bullish Strategy: Bullish Credit Put Spread
If you're think that IBM will release earnings numbers and Q4 outlook predictions that are going to be favorable for the price of IBM shares, then you might consider a bullish strategy, like the credit put spread, which aims to take a profit, while limiting the potential downside.

Here's what It looks like:

- Sell to Open IBM 21-Jul-23 133 Put
- Buy to Open IBM 21-Jul-23 128 Put

1. Strategy: A Bullish Credit Put Spread is a bullish strategy that involves selling a put option and buying another put option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate rise in the price of the underlying asset.

2. Trade Setup: In this case, the trader is selling to open a put option on IBM with a strike price of $133 and buying to open a put option with a strike price of $128. Both options expire on July 21st, 2023.

3. Premium and Risk: The trader is receiving a net premium of $1.77 per share (the difference between the mid prices of the two options), for a total cost of $177 (since each contract represents 100 shares). This is also the maximum risk of the trade. The maximum profit is $323, which is the difference between the strike prices ($5) minus the net premium received ($1.77), multiplied by 100.

4. Breakeven Point: The breakeven point at expiration is $131.23, which is the higher strike price minus the net premium received.

5. Probability of Profit (POP): The estimated POP is 54.65%. This is a rough estimate of the chance that the trade will be profitable at expiration. Please note that this is a simplification and actual probability may vary based on factors like changes in implied volatility or the price of the underlying asset. The POP is based on the delta.

6. Implied Volatility (IV) Rank: The IV Rank is 33.64, which is well above the 20%-mark.

7. Days to Expiration (DTE): There are 2 days left until the options expire.


2. Neutral Strategy: Iron Condor
If you think that IBM will stay in the expected move range right after the earnings, consider an iron condor. This strategy involves selling a call spread and a put spread on the same stock with the same expiration date. The goal is for the stock to stay between the strike prices of the sold options. This strategy is used when the trader expects the underlying stock to trade within a certain range until expiration.

The expected move of IBM before Friday-expiration can be calculated by summarizing the cost of an ATM call and ATM put on that expiration. This is an approximation. Using this method we know that the market expects the price of IBM to trade in a range of +/- $5.08.

Here's a possible setup:

- Buy to Open IBM 21-Jul-23 144 Call
- Sell to Open IBM 21-Jul-23 139 Call
- Sell to Open IBM 21-Jul-23 129 Put
- Buy to Open IBM 21-Jul-23 124 Put

Reason

High Implied Volatility (IV) due to numbers out on 19th July after market close

Expectation

Limited movement in IBM shares after releasing the figures and imploding IV

BEPs on expiry

Profit between $127.82 and $140.18

Max Risk

If you get a premium of $1.18 the max risk/loss would be $5 - $1.18 = $3.82 per share. 1 contract = 100 shares. Max Risk/Loss = $3.82 * 100 = $382.

If you were to perform such a trade it is good practice to wait until 1 to 4 hours before market close and try to get at least 1.50 credit, in order to maintain a good risk/reward-ration. The higher credit receive, the less risk you take.

For Who?

Only for traders/investors to adhere to the view that the numbers will not cause a move outside the expected move in the share price of IBM.

Trade set up

Sell the Iron Condor in the last 1 – 4 hours of trading on Wednesday 19th for around $ 1,45 - $1,50 (stagger in case of bigger positions). The more you can receive the more you limit your risk.

Closing

A GTC (Good Till Cancelled) order to close the position at $0,30 (stagger in case of bigger positions)

Emergency

If there is a big move in the underlying outside the bandwidth of the long strikes, monitor closely and close position latest on the 21th of July 2- 4 hours before expiry

Probability of Profit

60.77%
(on expiration, based on delta's of the short positions)

Expected Move

for 21th July ’23, based on ATM straddle: +/- $xx.xx

IV Rank

33.64%


3. Bearish Strategy: Bearish Credit Call Spread
If you think that the outcome of the earnings publication, along with the outlook for the coming quarter, might have a negative impact on the price of IBM stock, in the coming days, then you could consider a bearish credit call spread with nearby expiration.

This strategy involves selling a call option at a certain strike price and buying another call option at a higher strike price. Both options have the same expiration date. This strategy is used when the trader expects the underlying stock to fall moderately within a certain range (staying below the lower strike)

- Buy to Open IBM 21-Jul-23 139 Call
- Sell to Open IBM 21-Jul-23 134 Call

This is a Bearish Credit Call Spread on IBM with an expiration date of July 21st, 2023. Here's a breakdown of the trade:

1. Strategy: A Bearish Credit Call Spread is a bearish strategy that involves buying a call option and selling another call option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate decline in the price of the underlying asset.

2. Trade Setup: In this case, the trader is buying to open a call option on IBM with a strike price of $139 and selling to open a call option with a strike price of $134. Both options expire on July 21st, 2023.

3. Premium and Risk: The trader is receiving a net premium of $1.57 per share (approx. the difference between the mid prices of the two options), for a credit of $157 (since each contract represents 100 shares). This is also the maximum profit of the trade. The maximum risk is $343, which is the difference between the strike prices ($5) minus the net premium received ($1.57), multiplied by 100.

4. Breakeven Point: The breakeven point at expiration is $135.57, which is the lower strike price plus the net premium received.

5. Probability of Profit (POP): The estimated POP is 52.03%. This is a rough estimate of the chance that the trade will be profitable at expiration, based on the position's delta.

6. Implied Volatility (IV) Rank: The IV Rank is 33.64%, which is above 20%.

7. Days to Expiration (DTE): There are 2 days left until the options expire.
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