Written by Ophir Gottlieb
PREFACE
There is an option strategy that has worked very well for International Business Machines (NYSE:IBM) over the last two years, but it’s not about guessing stock direction.
In fact, there’s actually a lot less ‘luck’ and a lot more planning in successful option trading than many people know.
IBM is the large cap tech company has lost its way in the midst of a massive technology boom, seeing revenue and earnings at levels from a decade ago. But, even as the stock has stagnated over the last two-years, one bullish options trading strategy has an astonishing result.
STORY
Selling puts is one of many option trading strategies that can be employed to take advantage of a bull market. For International Business Machines Corp (NYSE:IBM), it has been a risky and treacherous trade if employed during earnings releases. Substantial losses would have accumulated. Here’s how we can see it explicitly with the CMLviz.com option back-tester Trade Machine.
After the set up, we get these results. Again, we’re just looking at trading the dates surrounding earnings releases.
The image above summarizes a back-test:
* Sell Puts
* Only during earnings
* Trade every 30-days
* Test the strategy for two-years
Selling puts has been a big loser when used on International Business Machines Corp (NYSE:IBM), especially when held during earnings. In fact, here’s how it looks compared to the stock price:
That yellow highlighted line is the option strategy employed only during earnings.
But the real analysis we want to examine is how well this strategy would have done if we eliminated that rather large risk of earnings.
That is to say, if we sold puts every 30-days in IBM, but every time earnings approached, we closed the strategy (held no position), then started the strategy again after the volatility of earnings had ended. Here are the results:
All of a sudden, the short put strategy turned out quite well and far outperformed the stock too. Here is the option strategy compared to the stock:
In this case we find a nice result – a profitable option strategy that removes the risk of earnings and delivers strong results even in a stock that has under-performed and faced a volatile past.
Here’s the best part, we can identify this approach in less than two-minutes for International Business Machines Corp (NYSE:IBM). Let’s check out this quick video:
WHY THIS MATTERS
Returning to the idea of back-testing again, there’s actually a lot less ‘luck’ and a lot more planning in successful option trading than many people know.
But it’s not about trying to guess which stocks will go up or down. That’s likely a losing bet over the short-term and extremely volatile. It’s quite the opposite.
What the back-tester allows us to do is find calm, low stress stocks or ETFs (like SPY, QQQ, etc), and find the option strategies that have created a high percentage of winning trades, gaining profitability slowly, while avoiding unnecessary risks — specifically, avoiding earnings.
In a six minute video, your entire view of the options world and what people reer to as ‘successful trading’, or ‘experts’ will be turned upside down — to your advantage.
Tap here to see the CML Pro option back-tester.
Thanks for reading, friends.
Risk Disclosure
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
