Anatomy of a Trade: IBM Earnings Play using Options

Set Up

IBM (ticker: $IBM) reported earnings after the bell on Monday the 18th. The chart below through noon that day shows that it has had a series of moves higher after breaking out of a consolidation range last September. It was in a bull flag between 174 and 178, and still about $10 from the Measured Move (MM) target of 183 – 185. On the downside there was support at about 171 and 166 followed by 160, a level it had not seen since March. $IBM is one of those stocks that have weekly options so I looked to them for an earnings play.

IBM ($IBM) Daily Chart

As I wrote the trade idea the nearest strike Straddle, the 175’s, was pricing in a 3.4% or $6 move by Friday on the weekly options. You could play the combination of buying the July 22 175/180 Call spread and funding it with a short 170 Put for a cost of 21c if you were willing to own the stock at 170. That is not a bad level. But it seemed if it dropped there was some risk of further downside to 166 or even 160. Looking a bit further out to the August 175/180 Call spread and funding it with a short 160 Put for about 90c gave a better entry point and still a shot at over a $4 profit on the Call spread.

Here is the link to the original posting from Monday: IBM Earnings Trade Ideas Using Options

Trade

I traded the August Spread shortly after publishing the article at noon Monday for 93 cents and waited for earnings. The 5 minute chart below shows what happened. $IBM reported great earnings and the stock popped as shown by the long green candle on the left side of the chart.

Following that it then settled in around 178.50 and closed the night. The next morning $IBM was trading steady around 178.50 again in the pre-market so I set my sites on taking off the trade near the open. Guessing at the volatility ramp down and looking at the current pre-market price for the stock I estimated the spread to go for $2.25 and put in an order to sell at 2.40 thinking I could adjust it quickly if the price started to fade. A you can see from the right side of the chart it opened and ran, taking me out in about 40 seconds. I sold at $2.40, up 158%. I gave up a lot, but I made a lot too! The spread actually went as high as $3.87 on the day.

Take Away

Risk Management was a key part of this trade working, and much of it was done prior to entering the trade. I was bullish but took the August spread over the July spread because I was willing to buy the stock at 160, but not at 170 if it missed. I was eager to close the trade early on Monday for three reasons; first I had a big profit, second the stock had not moved since reacting to the earnings the night before and third because it was an earnings play, not a swing trade or a long term position and the event had ended. Always remember why you got into a trade and what are your catalysts to get out.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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