IBM Option Trade Example – Strangle Strategy

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Strangle: In tonight's video update, we're going to go over just the one trade that we had on Monday, October 19th. All we did today was enter earnings strangle on IBM. Although some of the other trades that we had sent out in the earnings watch looked like okay trades, we just really didn't like the implied volatility.

It wasn't high enough. We didn't like options pricing. There wasn't a lot of liquidity, so IBM ended up being our only trade today that we ended up getting into. We got into it with a strangle. Again, with the weekly contracts, the October fours, there's a video tutorial inside of the membership area if you just search weekly tags that go through what the expiration tag is. 

Related "Strangle" Resources:

strangle

But as a real quick synopsis, the Oc four means that it's the fourth weekly option in October. So it expires on the fourth Friday in October, and that's the one that we're trading in. Again, we'll designate any weekly trades by the weeklies here in the alert. Now we did the one 57 and a half calls, and the 141 puts took in a big credit of a $115.

That moves our break-even point $115 out on either end. Again, here's the setup here with IBM. Implied volatility in the 66th percentile. High enough to start selling options and doing a strangle naked, but not high enough to start doing a straddle.

We would have loved to see implied volatility up near the 80th or 100th percentile to do a more aggressive straddle-type trade, where we're selling options right at the money. But in the case of IWM, we went out on either end just to about the one standard deviation level.

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So here's where the stock closed. It closed around 149, and you can see we went down to the 141. That's about the 15% probability of being in the money. Same thing on the top side. We went up to the 57 and a half, which is about the 15% probability of being in the money. I mention that on the alert, but so that you can see it here.

That's exactly how we space these trades out, and that was more than enough of the expected move on either end, which obviously covered that distance which was about six and a half dollars or so. Now after hours, the stock is trading down to about 141, so just above where our short strike is, and it looks like it should end up being hopefully tomorrow night's winning trade.

As long as the stock doesn't have any big, big moves down in pre-market trading, it should end up being a nice winning trade. As always, hope you guys enjoy these videos. If you have any comments or questions, please let me know. Add them right below, and I'll get back to you just as soon as I can. 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.