Trade the ‘Buffett Hole’ in International Business Machines Corp. (IBM) Stock

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I’ve long been on record that International Business Machines Corp. (NYSE:IBM) has been lost without a viable cause for a long while. Management has so far been unable to make the transition into the new world of cloud-based services. Even their most patient fan, Warren Buffett, recently gave up on them.

Trade the 'Buffett Hole' in International Business Machines Corp. (IBM) Stock

Yet I still find many experts arguing that a marked turnaround is in the making. I fail to see it. I compare that progress to that of Microsoft Corporation (NASDAQ:MSFT) and I don’t see them even in the same league.

This week we saw a headline that Facebook Inc’s (NASDAQ:FB) WhatsApp plans to ditch IBM’s cloud and it caused a tizzy in IBM stock. This cast even more doubt over the fleeting turnaround.

Fundamentally, however, IBM’s financial metrics aren’t terrible. With a price-book ratio of 8 it can’t be a huge mistake to own IBM shares here. But there are risks. There could be a wave of downgrades; analyst ratings are a predominant “hold,” which raises the risk of more analysts following Buffett’s exit. Also if IBM stock loses $150 it can invite technical sellers for another $10 from there.

But the largest potential risk still remains the impending Buffett headline when he exits his remaining stake in IBM. I believe it’s a matter of time.

Regardless, today I want to add a bullish IBM trade, but not because I believe in the turnaround … No, I want to sell risk while the “fear cloud” surrounding IBM stock is at its thickest. The trick, however, is to do this against proven support levels.

Trading IBM Stock

The Thesis: On the positive side, IBM stock has likely already shed its weak hands. Of those who are still fans of it, few will be scared away by the WhatsApp news. And therein lies the support. I don’t believe that current management is able to make the turn. So, this is a trade and I won’t let it turn into an investment.

The Trade: Sell IBM Sept $135/$130 credit put spread. This gives me a 90% theoretical chance of success to yield 11% on risk. Compare this with buying IBM stock and risking $151, without any buffer, then needing it to rally 11% just to match the performance of the spread.

Usually, I like to sell opposing risk for balance. In this case I will delay this entry since IBM has already corrected 15% in a couple of months. I would prefer to do this if IBM stock bounces a bit. Meanwhile, I will manage my risk against short term price gyrations.

Selling options is risky, so I never risk more than I can lose.

Learn how to generate income from options 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/trade-the-buffett-hole-in-international-business-machines-corp-ibm-stock/.

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