During the past few years, IBM (NYSE:IBM) has exhibited the ability to run relentlessly higher. The occasional dips have been aggressively bought causing the stock to continually capture new 52-week highs. After consolidating for much of the past month, the tech giant appears poised to break out to yet another all-time high.
Click to Enlarge When a stock breaks above a key resistance level, it creates an interesting situation where short-sellers run for the hills by buying to cover their losing positions, and sidelined bulls buy in to join what they hope will become a strong surge higher. With demand on the rise and supply largely absent, a lift in price becomes the most likely outcome.
Upon a successful break above $195, traders might consider purchasing April call vertical spreads on IBM to exploit a continuation in its trend. The call vertical spread, sometimes referred to as a bull call spread, consists of buying to open a lower strike call while selling to open a higher strike call in the same expiration month. The short call helps to reduce both the cost and risk of the trade, as well as hedge your risk to time decay and volatility.
Traders could buy the April 195 call while selling the April 200 call for a net debit around $2.15.
The maximum risk is limited to the initial $215 ($2.15 x 100) paid and will be incurred if IBM sits below $195 at April expiration.
The maximum reward is calculated by taking the distance between strike’s price minus the net debit. If the $5 spread is purchased for $2.15, the reward comes out to $2.85 and will be incurred if IBM rises above $200 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.