IBM (IBM) will enter the earnings confessional after the close of trading on Monday, and the situation heavily favors IBM stock bears.
Wall Street is currently expecting year-over-year declines of 11.5% for earnings, at $3.30 per share, and $12.5% for revenue, at $19.61 billion. What’s more, IMB stock is down 14% since May, and investor sentiment indicates low expectations of a rebound anytime soon.
Historically, IBM earnings have topped the consensus estimate in three of the past four quarters. Data from EarningsWhisper.com reflects this solid earnings history, with IBM’s whisper number coming in at $3.37 per share. But that optimism may work against IBM stock: This whisper number could make a post-earnings rally even harder if the company fails to hit this underlying target.
Any semblance of optimism for IBM stock ends with the whisper number, however. According to data from Thomson/First Call, the brokerage bunch has doled out just three “buy” ratings on IBM, compared to 14 “holds,” and four “sell” ratings. Furthermore, the 12-month price target for IBM stock rests at $160 — a premium of just 6.7% at current prices.
Options traders are also betting against the stock ahead of IBM earnings. Currently, the October/November put/call open interest ratio rests at 1.18, as puts easily outnumber calls among near-term options. This ratio dips slightly to 0.95 in the weekly October 23 series, but the lack of call OI for IBM’s quarterly report is still notable for this speculative group.
Click to EnlargeOverall, weekly October 23 series implieds are pricing in a potential post earnings move of about 4% for IBM stock. This places the upper bound at $155.99, while the lower bound rests at $144.01.
Technically, IBM is perched on a pivot point at $150, with its 50-day and 10-day moving averages poised for a bearish cross. As a result, the path of least resistance appears to be lower for the short term.
2 Trades for IBM Stock
Put Spread: While bearish sentiment this thick typically sends me looking for a contrarian play, IBM stock has earned this level of disdain from investors. As such, going with the flow on IBM may be the right course here. Traders siding with the bears might want to consider a November $145/$150 bear put spread.
At last check, this spread was offered $2.01, or $201 per pair of contracts. Breakeven lies at $147.99, while a maximum profit of $2.99, or $299 per pair of contracts, is possible if IBM closes at or below $145 when November options expire.
Call Sell: If betting directly against IBM stock isn’t your style, you might consider entering a weekly October 23 series $160 strike call sell position. Such a trade is especially useful if you already own IBM stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $160.
As of the latest data, this option was bid at 30 cents, or $30 per contract. A sold call allows you to keep the premium as long as IBM stock closes below $160 at expiration. On the downside, if IBM rallies above $160 prior to expiration, you could be forced to provide 100 shares at IBM’s current market value for each call sold, which could be quite costly if you do not have enough IBM stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
