I have been a long time critic of International Business Machines Corp. (NYSE:IBM). The problem is, for the past 12 months, Wall Street hasn’t shared my opinion, and IBM stock has been on fire.
So, I recently wrote about how to get paid to trade IBM stock. The trade, although not a home run, yielded easy profits.
Today, I want to take the other side.
IBM stock is near its all time highs, but it’s showing a whiff of weakness. With so much uncertainty ahead of markets, I fear downside pressure in the near-term. So consider this short idea more a call against price action rather than company pessimism.
By the way, I still don’t like IBM’s prospects, from a fundamental standpoint. They have failed to adopt their mega-machine of old into the new tech world. The highest-profile IBM focus has recently been artificial intelligence, but that is an old headline. It’s taking too long to blossom into a cash cow.
Assuming that experts are correct with their expectations of big things from artificial intelligence, I can use this in my trade as a fundamental basis for the long-term prospects of IBM. Affirmation to this is the recent headline of IBM’s alliance with Salesforce.com, Inc. (NYSE:CRM).
Maybe hanging to the coattails of the growth monster like Salesforce could keep IBM’s momentum going.
How to Short IBM Stock for Free
The bet: Buy IBM Apr $180/$175 debit put spread for $2 per contract. This is my maximum potential loss. The faster IBM stock falls through my spread, the faster my profits will accrue. I have a chance to double my money.
Since this more of a technically driven trade, I want to lower my out of pocket risk. To do this I will sell downside risk against levels that I deem safe.
The bank: Sell the IBM Jan 2018 $135 put for $3. I need IBM stock to stay above my strike sold or be put the stock. I only sell naked puts if I am willing and able to own IBM shares at that price. The 24% price buffer gives me a 90% theoretical chance of success on this leg.
By taking both trades, I would be getting paid to short IBM through April. Ideally, I need IBM stock to fall past my debit spread but stay above my credit sold. As long as IBM stock stays above my sold put, any premium I recapture from selling my debit spread would be profit. So I can still profit even if IBM does nothing.
I am not required to hold my trades open through expiration. I can close them early for partial gains or losses. I only risk what I can afford to lose.
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.
