You Have Even More 'Options' for Interactive Brokers

This week's Barron's featured an interest play on Interactive Brokers . The headline, along with actual pricing on those trades, is shown below. Here's my usual cash flow chart to show how the trades would have shaped up as of 4 p.m. last Friday. I worked up several possible outcomes for this, depending on where IBKR closes on the Jan. 20 expiration date. Just one of the scenarios shown would result in paper loss. That would only occur if IBKR, which looks good to me, drops 11.1% over the coming seven weeks. Even if IBKR declines to $75, the suggested trade would net a small profit, as both options would expire worthless. Unfortunately, the next few scenarios don't do any better. Here is what would happen if IBKR stays exactly level with its trade inception price. IBKR reaching $80 or $85 wouldn't produce more than a $70 profit, either. If IBKR continues to surge to $90 or $92 by Jan. 20, 2023, things start to look much better. Per contract gains would be $570 or $770 respectively. It is not inconceivable that IBKR can go that high in such a short time. It appears unlikely, though, based on all available historical data. IBKR's Dec. 28, 2021 all-time high was $82.83; it then quickly sold off again to as low as $52.18 in May of this year. When you boil down Barron's option play it goes like this: You'd have a low probability of losing money The most likely result would be a minor gain of $70 per contract You have a small chance of making from $570 to $770 per contract That is far better odds than a lottery ticket, but still appears unexciting, unless you are looking for a major upturn in IBKR by Jan. 20. It is unlikely that IBKR will have reported its fourth-quarter and full-year 2022 results before expiration day. When IBKR got cheap last May, I saw it as a good bargain and wrote it up as such. My end of 2022 target price was $83.64 based on projected earnings per share of $3.40 in 2022 and $3.80 in 2023. Value Line's analyst proved too low on 2022's results and now appears a bit under consensus on 2023's earnings prospects as well. Regular readers of my columns know I prefer selling options to buying them. If IBKR is likely to rise to $85 or higher why not simply sell naked puts out to March or June of next year at $80 and/or $85 strike prices? Here are the closing quotes on those as of 4 p.m. on Friday. Margins of safety are modest but not likely to come into play if our theory is correct. All the worst-case if exercised prices are clearly below the trade inception price. I'm going to illustrate various potential results for the June 16, 2023 expirations to contrast them to the first option play. If IBKR goes contrary to the bullish feelings there would be small paper losses if it closed at $70. Things turn up quickly, though, even if IBKR only holds $75 on expiration day. With IBKR down by 4.7% from the trade inception price there would be a tiny gain on the $85 put sale and a $220 per contract profit. If IBKR merely holds steady, those gains expand to either $381 or $591 per contract sold. That's pretty good on a stock which didn't go anywhere. If IBKR rises to $80 by June 16, 2023, paper profits reach $510 or $720 per 100-share contract. Any expiration day closing price of $85 or higher on IBKR would deliver the best-case results shown below. Every contract would then show either a $720 or $1,010 net gain depending on which strike prices you shorted. Here is the summary of my naked put selling suggestions: You have a small chance of a modest loss Anything less than a 4.7% decline in IBKR would allow for at least a small gain You have a strong likelihood of making significant profits Premiums received up front are all well in excess of the $70 credit taken in on the Barron's trading technique Fine future results should help IBKR climb over time Maximum gains of either $720 or $1,010 per contract appear attractive Progress in 2023 will take time to develop. Using January 2023 expiration date calls will not be able to capture much, if any, of that coming good news. June expirations will see two more quarterly reports before they expire. Interactive Brokers is a nice stock. I expect it to be higher over the coming 6 to 12 months. How you play it can make a big difference in your portfolio returns. The choice is yours.

You Have Even More 'Options' for Interactive Brokers

Here's how I would play IBKR.

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