Option Investor

Option Writer Portfolio - August

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International Business Machine (IBM) is showing signs of strength today while the rest of the market is weak. In fact as the chart below shows IBM has remained relatively stable throughout the market turmoil. If you aren't familiar with IBM it is BIG BLUE. IBM develops and manufactures information technologies, including computer systems, software, networking systems, storage devices, and microelectronics worldwide. Its Global Technology Services segment offers IT infrastructure and business process services, such as strategic outsourcing, business transformation outsourcing, integrated technology, and maintenance. The only scary thing to me is that the earnings are due July 17th.

As I am writing this the stock is gyrating between $121 and $123. With the EPS data coming out soon the risk premium is higher than normal. What we might end up doing is selling the calls farther out of the money as a hedge for the earnings and try to capture the decrease in premium after the corporate event has passed. At 13% the initial return is near our minimum. We are selling the August 115 Put with a target of $2.20 or greater. The 115 strike is chosen due to the stock's support level at the 200 day moving average (currently at $114.62). The stock is just below the 89 day moving average (grey line) and 7 points above the 200 day moving average (red line). The technical risk managment level will be at $116.00 which is the June low. Cost basis stop is set to $112.80.

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