IBM is showing an implied volatility percentile of 99%, which means the current level of IV is higher than 99% of all other occurrences in the last 12 months.
When volatility is high, it can be a good time to be an option seller rather than a buyer.
Part of the reason for the high volatility in IBM stock is because the company reports earnings on Friday before the market open.
Option traders can take advantage of the high volatility by selling a strangle. This option trading strategy involves selling an out-of-the-money put and an out-of-the-money call with the same expiration date.
This trade generates a premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky because they expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the trader is right and the stock trades sideways, solid gains are also possible.
IBM Stock Trade Generates $360 In Premium
Assuming a trader believes that IBM stock will trade sideways over earnings, he or she could look to sell an April 26, 175-strike put and an April 26, 210-strike call.
The 175 put can be sold for around $1.40 and the 210 call could be sold for around $1.20.
Selling those two options would generate a total of $260 in premium. That is the maximum possible gain on the trade if IBM stock closes between 175 and 210 on the day of expiration.
To work out the break-even price of the trade, subtract the premium received from the put strike price and add it the premium to the call strike price.
That gives us break-even prices of 172.40 and 212.60.
This trade is a short vega trade. That means if implied volatility increases early in the trade, losses could occur.
With a trade like this the potential losses are unlimited and a lot higher than the potential gains. So traders would want to be very confident that the stock is going to remain flat over the course of the trade.
Exit Strategy For IBD Stock Trade
A stop loss could be placed at the break-even points.
IBM stock has stayed within the expected range following three of the last six earnings reports.
According to the IBD Stock Checkup, IBM stock is ranked No. 9 in its industry group. It has a Composite Rating of 81, an EPS Rating of 64 and a Relative Strength Rating of 88.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on XTwitter at @OptiontradinIQ
