Scaling Calendars in IBM

[Steven Place]

IBM has seen a strong move after earnings, breaking the 165 resistance level, which had held for over 6 months. The measured move for that pattern is 180, which also coincides with the gap fill from the earnings action two quarters ago:

I think IBM is due to settle down in a range, as it’s already seen volatility expansion on the back of the earnings move.

The trade here is a scaling calendar:

Buy to open IBM Jun/Jul 175 put calendar @ 1.05 or lower

If IBM moves to 170 or 180, we will add to the trade.

[Steven Place]

170 Got Hit, time to add to the trade:

Buy To Open IBM Jun/Jul 170 Put calendar @1.03

If we see a move to 165 or 180 we’ll add the last round of calendars.

[Edwin Retief]

Hi Steven

Why do you decide to do a Put Calendar rather than a Call Calendar

Thanks

Edwin

[Steven Place]

Hi Edwin,

Put calendars work better if a stock starts in an uptrend… because these options will go out of the money and will be easier to close.

Also with call calendars… if a stock has a dividend coming up and you have short options that are in the money, you can see early assignment. Which isn’t fun, so I normally avoid using call calendars.

The greeks are basically the same but it comes down to assignment and executions.

[Steven Place]

Going to close the trade here:

Sell to close IBM Jun/Jul 175 Put Calendar @1.20
Sell to close IBM Jun/Jul 170 Put Calendar @1.15

That’s about a 13% return on risk after 2 weeks.

Could I hold for more? Yes, but that would put the position at risk of losing current profits. All it would take is a 4 point move in either direction to go back to breakeven, and given the fact that IBM has been in a pretty solid range for a while now means another move is up on deck. I’d rather take the money and run… and if IBM rips higher I’ll look at reentering.

[Author]

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