I have not been a fan of International Business Machines Corp. (NYSE:IBM) for a long time. It is my opinion that management was slow to shift cash cows. They lost their way and have yet to recover. They have been trying to carve a niche in artificial intelligence, but that story has been over a decade in the making. To use a poker term, they are pot-committed to AI.
Luckily, artificial intelligence has seen a recent resurgence in popularity so the wait may actually pay off to IBM longs.
Experts are in awe of what Watson can do. Unfortunately, its profit stream is taking too long to develop. IBM is no longer the sure long-term bet it once was. To me, it more resembles a startup with a cool product still finding its way.
Click to Enlarge Usually, I like to sell longer-dated risk in companies that I believe are long-term winners like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or Apple Inc. (NASDAQ:AAPL). In this case, I am putting my trust in the IBM price action more so than its fundamentals.
The Bet: Sell the IBM Oct $130 put. This is a bullish trade for which I collect $1.40 per contract to open. This trade has a 90% theoretical chance of success. This sounds like a great idea now, but it comes with risk. By selling the put naked, I am committing to buying the stock at $130 per share if IBM falls below it. Anything below $128.60 per share would accrue losses for me.
Selling naked puts is not suited for most investors, so I can modify the trade to make it more attainable.
The Alternate: Sell IBM $140/$135 credit put spread. This also is a bullish trade, but one with a finite risk profile. I collect 40 cents per contract to open. The 22% price buffer is smaller than that of selling the $130 naked put but for the finite risk profile advantage.
While 40 cents may sound too little, it would represent an 8% yield on money risked and for the high chance of success it carries it should elate most investors.
I chose longer-dated risk so I don’t have to fret the short-term gyrations. I find that longer-dated options risk is easier to manage. Also, I can close either of these trades at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
