ETFs are great for delta-neutral trades like iron condors and calendar spreads. because they buffer us from sudden, news-driven moves in any one stock. But some individual stocks are stable enough that, with the flexibility we have to adjust our calendar spreads, we can trade them without taking on an unacceptable level of risk. One stock that’s a good candidate for calendar spreads is IBM, and we’re going to use it for our third June Calendar Options trade.

The Thesis

IBM’s historic volatility for the past 12 months has stayed below 35%, and implied volatility on the options is now at a 10-month low. The next earnings date for the company is July 18, and the ex-dividend date for this quarter has passed. Moreover, July options are available, so we don’t have to take on a lot of vega risk. With 31 days to June expiration and the stock trading very close to $125, this is a nice opportunity to open a single calendar spread.

The Trade

Single-calendar adjustments sometimes require splitting the position twice, so we need at least four contracts. Here’s the trade we’re making today:

+4 IBM July 125 call
-4 IBM June 125 call
for a net debit of $1.55.

Our break-even points are at $121.50 and $128.75 on the underlying share price. With a relatively narrow profit range, single calendars very often need to be adjusted. If IBM gets too close to one of the break evens, we’ll start thinking about adjusting this into a double-calendar. But if the price stays stable, we have a good chance of locking in a 20% profit in about three weeks.

Last 5 posts by Condor Options

• Midweek Sméagol Reading - August 20th, 2008
• More on The Correlation Game - August 18th, 2008
• August Monthly Review - August 17th, 2008
• They Have the Passports to Prove It - August 13th, 2008
• Sleepy Nasdaq - August 12th, 2008