International Business Machines Corp. (IBM) is facing considerable pessimism heading into its quarterly earnings report. The consensus is expecting earnings of $4.81 per share on $22.07 billion in revenue, down 17% and 8.5% year-over-year, respectively. What’s more, IBM stock gave investors nothing but trouble in 2015, posting a total return of -12% last year.
Unfortunately for IBM stockholders, 2016 isn’t shaping up any better.
Fundamentally, IBM earnings have topped Wall Street’s expectations in each of the past four quarters. That said, guidance and declining revenue have ultimately undermined IBM stock, despite the better-than-expected reports.
Speaking of guidance, the brokerage community doesn’t look upon IBM’s prospects for 2016 favorably. According to data from Thomson/First Call, analysts have doled out just five “buy” ratings on IBM stock, compared to 14 “holds,” and five “sell” ratings. Furthermore, the 12-month price target for IBM stock rests at $146.50 — a premium of only about 11.7% to yesterday’s close.
Options traders are also betting against IBM ahead of earnings. Currently, the January/February put/call open interest ratio rests at moderate 0.71. However, this ratio balloons to 1.27 for the weekly January 22 series, as speculators favor puts heavily on options most affected by IBM’s earnings report.
Click to EnlargeOverall, weekly January 22 series implieds are pricing in a potential post earnings move of about 5.4% for IBM stock. This places the upper bound at $138.14, while the lower bound rests at $123.86.
A breach of support at $130 could serve as confirmation of a continued downtrend for IBM, while any upside will be limited by resistance at $140.
2 Trades for IBM Stock
Put Spread: Bearish sentiment on an underperforming stock is par for the course, and IBM has shown little that would pull the stock out of its current nosedive. As such, trading with the flow on IBM stock may be the right course here. Traders siding with the bears might want to consider a February $125/$130 bear put spread.
At last check, this spread was offered $1.30, or $130 per pair of contracts. Breakeven lies at $128.10, while a maximum profit of $3.70, or $370 per pair of contracts, is possible if IBM closes at or below $125 when February options expire.
Call Sell: If a neutral-to-bearish stance is more your trading style, then a weekly January 22 $150 call sell position might just fit the bill. 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 $150.
At last check, this option was bid at 20 cents, or $20 per contract. A sold call allows you keep the premium as long as IBM stock closes below $150 at expiration. On the downside, if IBM rallies above $150 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 don’t 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.
