IBM Update – Rolling Feb Call Spread Up and Out

by Dan January 18, 2018 10:02 am • Trade Ideas

On Friday’s Options Action, and in this space I laid out the near-term bull case for IBM into tonight’s Q4 print, and offered a defined risk way to play, click below to watch the clip:

Here was the trade idea and the rationale from Friday:

IBM ($164.30) BUY THE FEB 165 / 175 CALL SPREAD FOR $3.00
  • Buy 1 Feb 165 call for 4.15
  • Sell 1 Feb 175 call at 1.15

Breakeven on Feb expiration:

Profits of up to 7.00 between 168 and 175, max gain of 7 at 175 or higher

Losses of up to 3.00 between 165 & 168, total loss of 3 below 165

Rationale – This trade breaks-even at 168, a decent amount higher than the current stock price but captures next week’s earnings event. It risks only 2% of the underlying and targets a move higher to 175. If the stock disappoints on the event 3.00 is the maximum potential loss, much less than the implied move itself.

Since Friday IBM has rallied about 4%, and the Feb call spread above is now in the money, at the midpoint of the $10 wide call spread and worth $5. With hours till the earnings event, it makes sense to re-access the risk-reward of the trade. By staying long the current call spread I am now risking $5 to possibly make another $5 assuming the stock continues to rally into February expiration. Regular readers are familiar with our usual disclaimer for long premium directional trades into events, you need to get a lot of things right to just break-even, first and foremost direction, the magnitude of the move and timing.

Given the quick success of the trade and the upcoming earnings, we are going to roll this bullish view up and out and use the $2 in profits to finance most of the next trade.

Action: Sell to close IBM ($170) Feb 165 / 175 call spread at $5 for a $2 profit

-Selling 1 Feb 165 call at $8

-Buying to close 1 Feb 175 call for $3

And New Trade:

IBM ($170) Buy March 175 / 185 call spread for $2.30

-Buy to open 1 March 175 call for 3.50

-Sell to open 1 March 185 call at 1.20

Break-Even on March Expiration:

Profits: of up to 7.70 between 177.30 and 185 with max profit above 185

Losses of up to 2.30 between 177.30 and 175


Rationale: while I am rolling out to an out of the money call spread, I am now basically playing with the house’s money. If I was right on Friday, and the company puts up its second consecutive beat and raise, then this stock will be back towards the 52-week highs in the coming weeks, which is the low $180s… using the prior gains offers a great risk-reward from current levels in my opinion.