Another Reason for Bulls to Love Big Blue

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When a company beats analysts’ estimates on earnings, it’s usually good for the stock. Shares will usually gap and open at a higher price than the previous day’s close.

Some traders and investors will then buy the stock in anticipation of the stock moving higher only to be let down because shares will suddenly drop in price. Why is that? It could be because the stock gapped after an extended bullish trend.

Here is one gapping stock that may go higher, from a company that just knows how to keep reinventing itself.

International Business Machines Corp. (NYSE:IBM) just announced estimate-beating earnings. Revenues increased 4% from the previous quarter, and profits were about $5.5 million.

Technically, the stock gapped up on Friday after the announcement. What looks good about the stock continuing to possibly go higher is the fact that it gapped from a bearish downtrend.

Sometimes when a stock gaps up after a bullish run, it becomes extended. This is not the case with IBM. The stock does have some resistance in the $190 area but, if it can get past that, $194 looks like a lock.

And that’s why buying the IBM Feb 190 Calls for $2.35 or less here looks like the right way to play this name.

The long call strategy is relatively straightforward. The trade profits when the stock rises, and the call premium increases as the IBM option moves more and more in-the-money (i.e., a call is in-the-money” when the market price of the shares is higher than the strike price).

Maximum profit is unlimited because IBM can continue to rise, and the maximum loss is $2.35 – the amount spent to enter the trade — if IBM finishes below the $190 strike at February expiration.

Consider entering this trade idea if IBM can trade over Friday’s high, which was about $189. Go Big Blue!


Article printed from InvestorPlace Media, https://investorplace.com/2012/01/another-reason-for-bulls-to-love-big-blue-ibm/.

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