Thursday, July 16, 2009

IBM Earnings

IBM was the other tech behemoth to report earnings tonight. In assessing volatility and the options board, I didn't see much of an edge in playing the earnings announcement.

However, it may prove instructive to explain my rationale.

Although RIMM and APOL experienced a surge in implied volatility into earnings, that IV pop was largely absent in GOOG and IBM. While GOOG July options at least had some juice to play with, IBM July options weren't giving us much rope at all. We'll look at a few plays in a minute, but first let's break down volatility.

Current 30 day HV is at 22%. IBM has rallied 10% over the last week causing the shorter term measure of 10 day HV to rise considerably higher to 35%.

At the end of the day, IBM Implied volatility was sitting around 26%, a slight premium to 30 day HV, but a considerable discount to 10 day HV. This was one of the reasons why options weren't a slam dunk sell.
IBM closed today at $110.64. The July 115 calls were at a mere $.40 with the 105 puts at $.30. So selling strangles was out of the question- not enough premium.

I suppose you could have considered selling an ATM July straddle by shorting the 110 call and put for about $3.70, but that sure doesn't give us much breathing room. ($106.94 - $114.34). Were IBM to gap up or down more than 3% you'd be toast-

Assuming you hadn't played the July Straddle, August options would have been my next stop. If I had to I probably would have entered a short strangle or iron condor using the 120 calls and 100 puts.

It seems like the VIX Smack Down we've experienced has served to dampen some of the pre-earnings ramp up we historically see in individual stocks implied volatility. We're yet to get into the thick of things with earnings, so we don't have that large of a sampling size, but it seems as if we've seen quite a tempered reaction to most companies earnings (INTC being the exception). This would lead me to deduce that the lower IV going into earnings has been justified.

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