Using Options to Define and Limit Risk

| About: Interactive Brokers (IBKR)

Here is a contrarian idea to consider in the financial sector using options to help define and limit the risk:

Interactive Brokers Group, Inc. (NASDAQ:IBKR) 24.19. a Greenwich, Connecticut based IB serves both institutional and individual customers offering automated global electronic market making and brokerage services. It engages in order routing, executing and trade processing for equities, futures, and foreign exchange instruments on 70 electronic exchanges and trading venues worldwide. It provides bid and offer quotations on approximately 420,000 securities and futures listed on multiple electronic exchanges. The company also offers an order management, trade execution, and portfolio management platform to access multiple asset classes, such as stocks, options, futures, foreign exchange, and bonds.

The company has just raised its guidance and is now forecasting third-quarter earnings to be .55 - .65 with the announcement on October 23rd, well above the market estimates of .47, and have said they will buy back 8 million, or 20 percent of their outstanding stock. Yahoo finance shows IBKR trailing twelve-month price to earning ratio at 11.51 with a forward price to earnings ratio of 10.52 and with an attractive price to earnings growth ratio of .57. At 1.81 the total debt to equity ratio is low compared to many financials and is producing an appealing 21% return on equity.

While the current Historical Volatility is 84 and now declining and with an Implied Volatility Index Mean of 72.04 and declining, we expect to see the implied volatility back into the 55-60 range soon.

Consider this combination trade to benefit from the value and growth prospects of this online brokerage company:

* Sell IBKR Nov 20 put QBOWD .925 IV 72.65 Delta .2048

In the event the stock closes below 20 on the October expiration, be prepared to take the stock by assignment and then sell calls. In that event, the basis in the stock would then be 19.075 - about equal to the last pivot and before they announced higher earrings guidance and the stock buy back.

Next, consider this bull call spread:

* Buy IBKR Dec 25 call QBOLE 2.80 IV 65.75 Delta .5329
* Sell IBKR Dec 30 call QBOLF 1.05 IV 59.27 Delta -.2814

Debit 1.75 Position net delta .2515

While this spread does not have an implied volatility edge, it is long gamma since the Dec 25 has a gamma of .0518 while the Dec 30 gamma is .0488. This means the delta of the long call will increase faster than the delta of the short call as the stock price increases.

Combining the two trades produces an attractively priced combination with a net debit of .825, a net delta of .4563 with good upside potential and with an acceptable and manageable risk.

Disclosure: I do not currently have any positions in IBKR.