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IBM Earnings Calendar

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IBM has earnings (after close) on July 18th.

Currently it is trading around 157.50.

The July 22 157.50 straddle is trading at around 6.75, anticipating a 6.75 move after earnings.

The July 22 /Aug monthly calendars from 155 through 165 are trading around .40 - .45 cents..... .50 cents at worst

If you did some form of triple calendar (155-160-165) , the p/l chart shows a range of profitability from 150 - 170.

With a maximum gain of 5.00 and maximum loss of 1.35

You are selling 31 IV and buying 20 IV

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I think your range of profitability pretty much matches the implied move, which is what I would expect.  However, your max gain of 5.00 seems high, assuming you close the day after earnings announcement.   Here is how I would analyze the post-earnings prices:   IBM's options normally have IV of about 17.5%, so post earnings I would expect the Aug monthlies to have IV of 17.5% and the soon to expire weeklies still a big higher, say 20%.   Plugging these values into an option price calculator, I'd expect the day after earnings ATM call calendar to be worth about 1.90 if stock price is right at the strike - so with your triple structure, I think the max next day profit is closer to $3.00 if IBM stock price is right at your middle strike (and around $4.00 if its near your middle strike on short leg expiration day).   This would still represent a very nice gain.   However, the key to me for these hold through earnings calendars is stocks that have a history of staying within the implied move - and with IBM over the last few years is has had quite few out-sized moves, so its more of a gamble than its track record of staying within the implied this cycle.   

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When I was saying the max gain of $4.00 I was working under the plan of holding the July 22 series until friday when the time value is $0.00

Then it is just a matter of whether your long, 3 week options, are worth more than .45 cents of extrinsic value.

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You are right about the p/l charts.

During earnings periods, with all of the exaggerated IV's, they  very often can be misleading.

That is why you need to just look at what you are  paying for the spreads and know that your "shorts" will have $0.00 extrinsic value on July 22.

After that you are left with 3 strikes, that cost .45 cents each , of extrinsic value, that now have 3 weeks left on them.

Will they have more than .45 cents of time value with 3 weeks left?

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I have a feeling that I might be missing something here.

The July 22 ATM (157.50) straddle is trading at 6.75. So that is the "implied move".

I put on a triple calendar, short July 22/Long Aug Monthly 155 - 160 - 165.

I paid, on average, .45 cents for each of them.

I plan to hold them until the July 22 expiration.

I am aware of how unreliable P/L charts are during these pre/post earnings periods because of the wide IV differentials between expirations.

But, with that said....the P/L chart shows a range of profit from 148-170 which is WAY beyond the ATM straddle assumption of 6.75.

Somebody tell me what I am missing.

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After earnings, the vol of the Aug monthlies is likely to be around 17.5%.   So, for these options, I used 28 days to expiration, IV=17.5% and stock price of 148 (your lower break even point) and plugged these values into an options price calculator.  It showed the following values for your strikes 165=0.03, 160=0.07, 155=0.67 (total of 0.77).   We don't have to figure the short calls as they would all be worthless.   The upper end is a little different because you would have to buy back the short calls to close the trade and you'll have to pay a bit above intrinsic value to do so, so you just can't look at the time value but I think you get the picture.

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I have played all kinds of calendars post earnings and from my experience IBM is not a good candidate for hold thru earnings  as it is a very low IV stock.

That means, your  calendar strike price has to be very close to the trading price for calendar to really make good money. A quick move away, the calendar can slope downward quickly.

Its better to trade very high IV stock for hold thru calendars.

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I know IBM is not the best candidate but, since, in their own way , every earnings play, that goes through earnings,  involves speculation, albeit, a more statistically informed, version of speculation....

in this case, even if we wind up at the "tails" of profitability, the loss is almost nill.

It seems that it is worth the "minimal" risk.

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I ended up doing the IBM July 22/Aug monthly 155-160-165 triple calendar, and held through earnings.

The straddle expected an $8.00 move.

The stock was unchanged and has traded between +$1.00 and -$1.00

I bought the calendars for an average of .40 cents each and just sold most of them for $1.20 each.

300% ROI

Despite the great results, this makes me less inclined to do more of this because I feel there is more speculation in these sort of trades which is something I want to stay away from as much as possible.

I would much prefer to sell high IV , defined risk , premium during "non- earnings" periods.

I believe there is less speculation and more of a real edge.

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Congrats! But don't forget that this was as good as it gets. Take a look for example at 170 calendar which is 10 points from the stock - it is trading at 0.20. This is what your ATM calendar would be worth if IBM moved 10 points. 10 points is ~6%, not uncommon for IBM. So you are right, those are good for occasional speculation with small allocation.

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Like I said...ironically, despite the great results, this makes me less inclined to do this in the future because I do not see any statistical "edge".

All of the probabilities, that do have some real meaning, during "non-earnings" periods, are thrown out the window when a "binary" event , such as earnings, is at stake.

There are only 2 "through earnings" trades that one can make...

1- "gambling/speculating" on a less than expected move or..

 

2- "....................." on a greater than expected move

In both cases it is gambling and there is no reliable data to give one any kind of "edge" in which way to go with this decision.

Looking at whether certain stocks have had greater , or lesser, than expected moves, in the past, for me, is not a good enough form of analysis to base this kind of decision on.

But, yes, in this case, because the cost, and risk, was very cheap, it was one of the rare times I chose to participate.

But , I was fully aware of what I was getting myself into and was willing to accept the risk.

Did you happen to observe what IBM did between 4:09 (when the earnings came out yesterday) and around 4:30?

The expected move was around $8.00

It started up about + $1.00 to 161...then, over the course of the next 20 minutes, it fell to 155, then immediately rose to 165, before settling in at 162.

Then, today it opened basically unchanged.

I am much more comfortable selling , high IV, delta neutral, premium, during non-earnings periods because the probabilities are more reliable, and you have a "vega" as well as "theta" edge.

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