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IBM: Using Options to Predict a Range

One options trader expects IBM to remain range-bound this week

by 7/31/2014 10:19:32 AM
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The shares of International Business Machines Corp. (NYSE:IBM) have been struggling to topple the $195 area, notching just one weekly close atop this level since August 2013. Against this backdrop, it looks like one options trader is betting on IBM to remain range-bound through tomorrow's close.

Late yesterday, symmetrical blocks of 234 contracts traded at four weekly strikes: the weekly 8/1 187.50- and 190-strike puts, and the 195- and 197.50-strike calls. The "outside legs" -- the 187.50-strike puts and 197.50-strike calls -- traded on the ask side, suggesting they were bought. The "inside legs" crossed on the bid side, suggesting they were sold. In other words, it looks like the speculator may have constructed a very short-term iron condor on IBM.

The pair of sold options generated a credit of $0.51, while the pair of bought options resulted in a debit of $0.16. As such, the iron condor was established for a net credit of $0.35 per quartet of options -- which represents the maximum potential reward on the play. In fact, the speculator can pocket the entire net credit if IBM remains between $190 and $195 (the sold strikes) through tomorrow's close, when the weekly options expire.

Should IBM make a big move in either direction, the bought legs reduce the trader's risk. Specifically, the most the investor can lose is $2.15 (difference between bought and sold strikes, minus net credit), should IBM perforate either of the bought strikes -- $187.50 and $197.50 -- before tomorrow's close.

Weekly Chart of IBM since July 2013

Technically speaking, the stock is more likely to topple the long call strike, should it break out of its recent range. At last check, International Business Machines Corp. (NYSE:IBM) is flirting with breakeven around $194.


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