International Business Machines (IBM) is facing a considerable lack of confidence from Wall Street as the blue-chip computer services company prepares to release its first-quarter earnings report. We’ll take a look at what the Street is expecting, then explore an options trade to make on IBM stock before the company reports.
The Dow Jones Industrial Average component will step into the earnings limelight after the close of trading Wednesday night, with analysts expecting earnings of $2.54 per share of IBM stock, down from an even $3 per share a year ago.
On the top line, analysts expect IBM to hit $22.93 billion for Q1. IBM has had trouble hitting sales estimates during the past several quarters, with competition from upstart cloud services companies disrupting IBM’s more traditional business model.
IBM is adapting, however, leading to restructuring charges that have also pressured revenue and earnings figures.
The consensus is taking most of this in stride, but IBM stock could react significantly to any changes in guidance. Currently, IBM is forecasting full-year non-GAAP earnings of at least $18 per share. Any upward revisions to this figure should bode considerably well for IBM stock.
On the sentiment front, there isn’t much faith that IBM will boost its guidance anytime soon. For instance, Thompson/First Call reports that 20 of the 25 analysts following IBM stock rate it a “hold” or worse, compared to just five “buy” ratings. What’s more, the consensus 12-month price target of $190 represents a discount to IBM’s current perch in the $196 area.
Options traders are also betting heavily against IBM stock. IBM has attracted 120,852 put contracts in the front two months of options, compared to 104,031 call contracts — a put/call open interest ratio of 1.16. Furthermore, this ratio rises to 1.26 when we look at just the IBM’s April options.
The heaviest accumulations of IBM put open interest reside at the out-of-the-money April $190 strike, which sports 14,769 contracts, and the deeper-out-of-the-money April $182.50 strike, where 12,050 contracts reside. On the call side, there are 15,632 contracts at the in-the-money April $195 strike, while another 9,586 calls reside at the overhead April $200 strike.
Taking a closer look at the soon-to-expire April options, implieds are pricing in a potential post-earnings move of about 3.8%. This places the upper bound at roughly $205, while the lower bound lies just below $190.
Click to Enlarge Technically, IBM has not topped the $200 level since the middle of last year. The $190 region, meanwhile, acted as resistance in January, but could now provide a modicum of short-term support for IBM stock. Shares are currently in the midst of a strong rally off their February lows, having gained more than 14%.
This rally has also pulled IBM’s 50- and 200-day moving averages into a bullish cross. This technical formation is also known as a golden cross, and could be a sign that additional buying strength is available for IBM stock … if the company can satisfy Wall Street’s earnings expectations on Wednesday, anyway.
2 Options Trades on IBM Stock
There are two ways to trade IBM stock ahead of this week’s earnings report:
- May $195/$200 bull call spread: The first is to bet on the current trend by opening a May $195/$200 bull call spread. At last check, this spread was offered at $2.66, or $266 per pair of contracts. Breakeven rests at $197.66, while a maximum profit of $2.34 is possible if IBM closes at or above $200 when May options expire.
- Sell May $180 puts: Alternately, if you’re not all that confident in IBM stock, a May $180 put sell has a high probability of finishing out of the money. As of the close last night, this option was bid at $1.02, or $02 per contract. As usual with a put sell, you keep the premium as long as IBM closes above $180 when May options expire. On the downside, if IBM trades below $180 prior to May options expiration, you could be assigned 100 shares for each put sold at a cost of $180 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.