A couple of weeks ago I wrote about shorting International Business Machines Corp. (NYSE:IBM) stock for free. The trade delivered profits, and now I need to rest it on a different timeline.
I know that most experts don’t agree, but I’m still not a fan of IBM’s fundamentals. They have been trying to steer that giant ship for years without yet hitting the sweet spot. I have to admit that lately, the rhetoric of its foray into artificial intelligence (AI) has gained momentum, so maybe this time AI will bring home the cash cow.
Click to Enlarge Until then, I continue to trade IBM stock more on its technical than its fundamental prospects. Since my last write up, it filled the downside potential of the break perfectly.
Usually that could bring about a pursuant bounce. But in this case, IBM stock has fallen into the clutches of another potential breakdown with a target that could retest $170.
I never sell stocks short outright, as I tend to be a conservative fundamental trader. Instead I use the options markets to put my thesis to the test. Most often, as in this case, I use the value of the stock I am shorting against its shorter-term price action.
I will use IBM’s value to generate enough income to short the price action that the technicals could be forecasting. So in reality, I am half long the stock even when I am shorting it.
IBM Stock Trade Idea
The Bearish Bet Against IBM Price: Buy the IBM May $175/$170 debit put spread for $2 per contract. This is a bearish trade where the cost of entry is my maximum potential loss. If IBM falls through my spread, I stand to double my money.
To mitigate my risk, I will reduce my out-of-pocket expense by selling downside risk against proven support levels in IBM.
The Bank (Optional): Sell the IBM Oct $145 put for $2.50 per share or better. This is a bullish trade that requires prices stay above my sold strike through mid-October. Otherwise, I am committed to owning IBM shares at that price if it falls below it. Selling puts is dangerous, so I only do it if I am willing to accept losses below my strike. Statistically, this leg has a 90% theoretical chance of success. IBM would need to set a new 12-months low. Worst-case scenario, I would be long IBM shares at 17% discount from current price.
Taking both trades means that I could still profit even if IBM does nothing. As long as price stays above my sold put, any premium I recapture from selling the debit put spreads would be pure profits. I can close any of my trades at any time for partial gains or losses.
Learn options as easy as 1-2-3 here. 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.
