Stock Analysts Still Can’t Predict Earnings (IBM Example)

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Predict earnings: In tonight's video, we're just going to cover real quick our one earnings trade that we did get down for Monday in IBM. That's pretty much the only trade that we had on our list that had great implied volatility, so I want to cover that in detail tonight, but I think, it's really funny that we also are going to cover just one of the headlines that came out before IBM reported earnings.

There's probably five or six of these style of headlines, but this one I think was the one that kind of caught my attention. It came out in Benzinga, and you can see that somebody, Udall, whoever that is, some stock picker or somebody they believe to be a market analyst of some kind, I haven't done a lot of searching for his name, but this was a top trending story before IBM announced earnings. 

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He said Udall believes shares of IBM could trade up to as high as $190 amid a good quarterly profit. I think what's really interesting about this is here you have the market reporting on these assumptions that people have, and this guy may be some highfalutin stock picker of some kind.

But not only was he completely wrong in the direction of IBM, and if he's in that market as an analyst, he has no pulse on the market and completely surprised everyone, so again, so, so efficient, the markets are right now. Two is that $190 is so outside of the expected range, that it's almost laughable that somebody would take this a little bit serious.

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Again, just goes to show you, I'm not trying to bust this guy or whoever it is, but it just goes to show you that there's just a number of different people out there that are trying to predict where all these stocks are going to go and we all have no clue where they're going to go. Whether IBM's going to have a good quarter or a bad quarter, whatever, it doesn't matter, so all we can do it trade off the probabilities.

Here's a chart here of IBM implied volatility. Very high heading into earnings in the 84th percentiles at the end of the day. The stock's been on a little bit of a run right now, and I guess that's why most people assume that maybe the stock would have a bigger move higher or whatever the case is.

We played it pretty neutral like we always do with these earnings trades, trying to assume that the stock might make a big move in either direction as long as it's outside of our expected range. Now in the case of IBM the expected move was about $7, so it actually increased just a little bit as we head toward the end of the day.

But it was about $7, and so we wanted to get outside of that expected move by going out to about the about the 82.5, 85 spread on the topside and then down to the 65, 62.5 spread on the bottom side. We just got outside that expected move from where the stock was trading at the time we entered this trade.

Again, just as a highlight here you can see whoever that was that made the prediction that the stock could move up to about the 190 range, well the probability based on the entire trading history of IBM current implied volatility, all the market participants, everybody who's participating in this current stock right now, the likelihood that it would move up to that level this earnings event is about 7.5%.

You could say that there's about a 92.5% chance that it never gets to 190. Again, why I think that what I'm doing here at Option Alpha and my goal here is just to inform people and help you make better-educated decisions instead of seeing some of these crazy headlines come over and then trying to act on those headlines like they're real, viable information when in fact they aren't.

With IBM, like I said, we went ahead and did the iron condor right over the market. Here's where our iron condor is balanced right now, kind of right over where the stock closed the day. After hours, IBM's trading around the 164 range, so a couple of pennies below our break-even price; we'll just have to watch this and monitor this tomorrow morning after it opens.

Again, the first thing that we're going to do is just roll down this call side here that we have that's now out of the money and it's going to be profitable. We're going to roll that closer and try to create an iron butterfly right over where the stock is trading right now. That's going to be the mission is roll down the call side.

We might look to stay in the same weekly contracts just for a couple days, see if we can't get any quick premium adjustment in this thing, and then if we need to ... Sorry, the phone. If we need to, roll out to the next monthly contracts at the end of the week.

That might be something that we look for this week since we do have so much time between now and expiration at the end of the week with these weekly contracts. We can kind of play this for a couple days and see if it works out in our favor, see if IBM maybe trades in kind of a volatile range in between our strikes, have an opportunity to close out.

If not, we can roll it to the next monthly contract, assuming that we can still get a nice credit for the trade overall. That's our quick update on IBM and earnings. Again, if you have any questions or comments, please add them right below into the comments section, and until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.