Since getting sent to the doghouse for daring to disappoint Wall Street, International Business Machines Corp. (NYSE:IBM) has been wallowing in its sorrows. Like a wounded puppy, IBM stock is languishing, unmotivated to move higher or lower. And therein lies opportunity.
In trader jargon, IBM is forming a low base. More on that in a second.
At $160.50, IBM has now fallen 12% from its 52-week high. The earnings-induced plunge carried shares of the tech juggernaut back below its 200-day moving average for the first time since March of last year. With the stock now in downtrends across the board, it is game on for bearish strategies.
What makes the past week of basing so appealing is it has allowed IBM stock to work off the oversold pressure that came after its earnings plunge. Furthermore, the fact that the stock hasn’t been able to mount any type of rebound attempt is telling. The odds favor further downside once this pausing pattern completes. Watch for a trigger below $160 in the coming days to signal the beginning of another down-leg.
The next stop for the stock’s descent is $157.50. This price level marks an unfilled gap that was created when stocks hopped higher following the Nov. 8 Presidential election.
Embrace the IBM Weakness
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With earnings in the rearview mirror, IBM options have become cheap once more. Such lowly prices are making put option purchases mighty tempting here. If you think the stock continues plumbing the depths, consider buying a put diagonal spread here.
Buy to open the June $160 put while selling to open the May $157.50 put for a net debit of $2.10. Your risk is limited to the initial cost and will be lost if IBM stock sits above $160 at June expiration.
If IBM shares drop toward $157.50 or lower near May expiration, you should be able to capture around a 70 cent to $1 profit. Consider taking profits if you can close the spread for $2.80 or better.
To minimize the loss, you could exit the position if the stock breaks back above its 200-day moving average, which is currently perched at $165.
At the time of this writing, Tyler Craig held bearish option positions in IBM.
