The market has certainly been volatile over the last several weeks. Looking for possible trades has left a few traders scratching their heads. Stocks have often acted with erratic moves. Here is a trade idea on a stock whose unexplained move lower can now be a perfect opportunity to profit.
International Business Machines Corp. (NYSE:IBM): Put Credit Spread
The trade: Sell the March 190/195 Put Credit Spread (selling the March 195 put and buying the March 190 put) for 0.85 or better.
The strategy: The maximum potential profit for this trade is 85 cents if IBM is trading above $195 at March expiration. The maximum loss is $4.15 ($5.00 – 85 cents) if IBM is trading below $190 at March expiration. Breakeven is $194.15 at expiration based on an 85-cent credit.
The rationale: IBM announced earnings back on Jan.22 and the next day shares were up 4%. The company reported quarterly revenue of over $29 billion and EPS of $5.39. IBM also expects to increase its EPS to $20 by 2015. However since the gap higher, the stock has failed to increase in value and recently has started to slide lower which gives option traders an opportunity.
The stock gapped down on Tuesday and Wednesday, traded lower on both days with buyers moving the stock higher again into the close. This could be a possible reversal sign setting-up. For this trade idea to profit, we need the stock to stay above two critical areas on the chart. First the daily 200 simple moving average is right around $197 and might act as support for the stock and keep it from moving lower like it has in the past. Plus there is also a previous resistance area at around $196 which can now also be considered support for the stock. If the stock reverses and moves higher once again or the two areas of support do their job, the credit received from this spread will be the traders to keep. Go Big Blue!
No positions held at the time of publication. If you are interested in more trade ideas from John Kmiecik, please visit us at MarketTaker.com.