Bet on Big Blue’s Bleed Continuing

by John Kmiecik | September 3, 2013 8:23 am

Now that summer is unofficially over thanks to Labor Day passing, it’s time for market participants to get back to work. Will the markets continue to slide, or will the bleeding finally end?

Here is a trade idea on a stock that has been slowly bleeding — and needs to continue to do so for this trade to profit.

International Business Machines (IBM[1] — $182.27): Call Credit Spread

The trade: Sell the Oct 04 190/195 Call Credit Spread (selling the Oct 04 190 call and buying the Oct 04 195 call) for 60 cents or better.

The strategy: The maximum potential profit for this trade is 60 cents if IBM is trading below $190 at October expiration. Both call options would expire worthless. The maximum loss is $4.40 ($5 – $0.60) if IBM is trading above $195 at October expiration. Breakeven is $190.60 at expiration based on a credit of 60 cents

The rationale: After IBM announced earnings in mid-July, the stock has been slowly descending lower. The company indicated that the substantial second-half gain it was expecting will in fact probably not be achieved by the end of the year. IBM had to scale down its expectations, which is never a positive factor for a stock’s value. The company also said sales were roughly flat in markets that they were seeking opportunities for growth in.

IBMchart 300x133 Bet on Big Blue's Bleed Continuing
Click to Enlarge
Getting to the chart, the stock slipped below an area of support around $190 in early August and has continued to slide. There is no doubt that the stock is going to reverse at some point, but the question becomes “when?” With the market and IBM currently not looking very bullish, it might be a tall order for the stock to once again move past resistance at $190 before expiration. In addition, the current implied volatility is higher than historical levels, making the options a little expensive and a bonus for a credit spread like this.

Go Big Blue! (Just not up!)

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[2].

Endnotes:
  1. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  2. free trial of John’s live options trading room here: http://markettaker.com/options_insider_trial/

Source URL: http://investorplace.com/2013/09/credit-spread-international-business-machines-ibm/
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