International Business Machines Corp. (NYSE:IBM) shareholders are on cloud nine these days, even though once upon a time, IBM stock was in the depths of despair. In the midst of a bull market for the ages, the tech giant fell as much as 46% from its highs. With the rest of the tech sector basking in profits and glory, IBM shareholders were relegated to dumpster diving for food.
And then, the tides turned. In January 2016, the multiyear slide finally stopped. And since then, IBM stock has climbed some 53% amidst an epic comeback.
This week’s post-earnings celebration is placing a rousing exclamation point on the whole saga. Since beating earnings expectations last Thursday, IBM has blasted through resistance and tagged a fresh 52-week high.
Would-be buyers should exercise some caution here, however.
The stock has become overbought in a hurry, and bulls are begging for a breather. For confirmation of its stretched status, look no further than the Stochastics indicator shown in the lower panel of the accompanying chart.
IBM’s sudden price ramp has driven this popular oscillator to the upper end of its range.
For the uninitiated, the Stochastics indicator flashes an oversold signal when it descends below 20 while flashing an overbought signal when it rises above 80.
A Pair of IBM Stock Option Trades
The setup in IBM presents an interesting trading opportunity. If you’re a go-with-the-flow trend trader, I suggest waiting for a down day or two before entering bullish plays. If you’re looking for a high probability of success, consider selling the March $170/$165 bull put spread for $1 or more after a price dip.
If you’re looking to fade the strength and potentially profit from a slight drop in the stock, consider selling a March $185/$190 bear call spread for around 70 cents. The max reward is limited to the initial 70 cents and will be captured if the stock sits below $185 at expiration. The max loss is $4.30 and will be forfeited if IBM sits above $190 at expiration.
Since the stock is in a strong uptrend, I suggest exiting early if you can escape with most of the 70 cent profit.
At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.
