The bears’ regime in International Business Machines Corp. (IBM) is flourishing. Occasional bullish uprisings continue to be stamped out in short order, and it appears the peasantry have fully accepted the inevitability of failed rallies and falling prices.
The dominance of downtrends is on full display in IBM, which has fallen about 40% in the past three years. Its latest setback came in the form of a sizable drop following earnings. The one-day drubbing ushered Big Blue to a new 5-year low south of $120.
Fortunately for bulls we’ve since seen the stock claw its way back and fill the earnings gap. Unfortunately for bulls, the gap fill did little to improve the technical posture of IBM stock.
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The ailing tech behemoth remains entrenched in a downtrend complete with descending 200-, 50- and 20-day moving averages.
With resistance aplenty looming overhead, and the sell the rally crowd still firmly in control, the current pop in IBM should be viewed with extreme skepticism.
In fact, you could view the retracement as a low risk opportunity for entering new bearish plays.
An IBM Stock Options Trade
IBM’s post-earnings volatility crush was cut short last week. Demand for options has swelled in recent days, driving implied volatility back to 57%. Any reading above 50 signals options have inflated to rich-enough levels to make them ripe for the selling. This, plus the stock rally, provides an interesting opportunity for selling bear call spreads.
Sell the March $130/$135 call spread for $1.05 net credit. Consider it a wager that IBM stock price sits below $130 at March expiration. The max reward is capped at the initial $1.05 credit received at trade entry and will be captured if the calls expire out-of-the-money.
The max risk is limited to the distance between strikes minus the net credit, or $3.95, and will be forfeited if IBM’s stock price rises above $135 by expiration. Of course, traders can reduce the loss by exiting early if IBM stock rises above the $130 strike price, or perhaps above the descending 50-day moving average near $132.50.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
