UPDATE December 9, 2010

Close the positon now for profit if you have not, you should not be holding this position into next week.  Pay up to .40

UPDATE December 1, 2010

We are now moving into profitability with the spread pricing right around $1.05.

For those of you who are skittish, and if you were able to sell the spread for more than $1.30, place a GTC bid to close at $.95 - if you sold the spread for $1.25, place your GTC bid to close at .90 cents and leave these orders on till tomorrow after the close.  (if you can’t do GTC, just enter the orders today and tomorrow).  I will re-evaluate on Friday for those of you who don’t get out.

Next week is fairly quiet one with respect to economic data, but I want you all to keep looking at this spread and when it hits .75, I want to begin taking profits in the position.  Not that I don’t think IBM can stay in this range, I am still concerned with surprises.

Strategic mindset: Neutral on IBM, looking for range into Dec expiration with NO earnings.

From a purely statistical approach and taking advantage of the thanksgiving seasonality and support going into the holiday, I am choosing to employ a December short Iron Condor on IBM for the next 25 days, with the anticipation that IBM will stay within a $10 range in the next 25 days. Time decay will begin to accelerate as we march into December.  Hoping that this week, which has typically been the case, will be quiet. As long as IBM stays within our breakeven levels of about $138.75 and $151.25, the time decay will help to fend off adverse delta changes. 

 

*** YOU CAN LEG IN, BY SELLING PUT SPREAD TODAY and SELLING CALL SPREAD BEFORE WED CLOSE*** - this is if you are intimate with IBM and feel confident about a recovery from here.  For me, I chose to enter as a spread.

 

Target:  IBM trading at $144

Commit Criteria:

IBM tends to stay within ranges.  They do not report earnings until Jan and since we are just coming out of earnings season, catalysts will be minimal in that regard.  We do have to be cautious of macro economic data.  I believe there is more risk to the upside, but, the stock has not exceeded $150 in the past...

 I am hoping with the positive retail and overall earnings data that $140 becomes new support for IBM.

**If you are nervous about downside, you can reduce the put spread to a width of 5 instead of 10***
The MONTHLY ATR is under $10 for IBM and it has more of a tendency stay range bound. this bodes well for our $10 wide spread

You may have to endure a bit of volatility going into Dec expiration, but I believe this range fits technically and fundamentally (on a P/E basis

Tactic: Short Iron Condor (credit)

The tactic that we’re using for this trade is a Short Iron Condor.  Short Iron condors will always generate a credit. We are selling the inner strikes and buying the outers.   This strategy prefers minimal rangebound movement.  We would prefer the stock to stay within 140 and 150 by December expiration in 25 days.  We also WANT volatility to decrease if IBM is in between 140 and 150.  If IBM stays relatively still, we may see a profit before expiration because of the width of the strikes compounded with time decay and Vega.  The last day (expiration) is when the most profit would be realized.  

Tactical Employment:

  • Buy to open 10 December 130 puts
  • Sell to open 10 December 140 puts
  • Sell to open 10 December 150 calls
  • Buy to open 10 December 160 calls
  • As a spread
  •  

  • For a net credit of $1.25 or more
  • Max risk per spread = $8.75
  • Max profit = 1.25 per share; $125 per spread 
  • Break evens = $138.75, $151.25

 

Here’s how the tactic is employed:  we'll enter the iron condor spread by buying the December 130 put and selling the December 140 put, simultaneously we will trading the same amount of the calls  (10) by purchasing the December 160 calls and selling the December 150 calls  as a spread for a net credit of $1.25 or MORE.  If the stock moves lower or higher sharply, or position will suffer, as we are looking for tight range bound movement.  You may have to endure some intra-trade P&L changes, just stick to the plan.     Our goal is just to have IBM in between 140 and 150 on December expiration.

 

Mid-course guidance:

We will monitor the trade for changes in price, this trade is nice because it shouldn’t decrease in value quickly unless the stock starts to break through our short call or put strikes, at which point we will evaluate whether or not to hold the position.     If we can buy the iron condor for $.75, that is an acceptable midcourse target, place bids to buy back the condor each day at that price limit, good for the day.  Time decay will help us.  The main goal here is to have the position on until expiration if IBM seems like its staying within range.   And to capture the full amount

Eject Criteria:

$2.00 loss maximum, which would mean having to close the spread for $3.25 debit.   So if the spread INCREASES in value to that point, then we'll consider closing the spread if it still doesn’t seem like IBM is going to revert back into our profitable zone. 

Short Iron Condors like this one, should not have volatile drawdowns in value unless IBM exceeds our short strikes.  Close trade if commit criteria changes. Check your calendar so you are aware of events!!

Profit Goal:

Preferably, we would like to get the max profit of $1.25  out of this trade, that will generally not occur until expiration, so the ultimate goal here is to try and squeeze a minimum of $.50  (that will make the trade worth doing) out of the trade., which means closing the spread for a $.75 or less debit upon closing.  ($.50 profit is a return of 6% on our risk in 25 days.)

This is an elevated probability trade, which is why we are making some sacrifice on profit..

Exit:

  •  
  • Sell to close 10 December 130 puts
  • Buy to close 10 December 140 puts
  • Sell to close 10 December 150 calls
  • Buy to close 10 December 160 calls
  • As a spread

  •  
  • For a net debit of $.75 (or LESS)
  • We may also let the options expire if IBM is at least $1.00 away from our short strikes