Go Long International Business Machines Corp. (IBM) Stock With Confidence

Advertisement

Back on March 21, I shared a bearish trade on International Business Machines Corp. (NYSE:IBM) that delivered more than $1.20 per share in profits. With profits in hand, and IBM earnings on tap this week, I want to put together another trade on IBM stock.

Go Long International Business Machines Corp. (IBM) Stock With Confidence

Source: Shutterstock

Fundamentally, nothing really has changed since my previous trade idea. The company is slowly making the turn into better profit models in this cloud-based world of the future.

Although I’ve been publicly critical of IBM management, Wall Street still gives them the benefit of the doubt. So don’t mistake this bullish trade setup for my optimism for the company’s prospects. It’s a mere play on price action ahead of Tuesday evening’s Q1 earnings report. That’s it.

Technically, IBM stock broke a trend and is in the process of pricing in the consequential measured downside move. Currently, IBM is priced at a pivotal level — $169 per share — that had served as resistance through January before its last breakout. Now it needs to serve as ongoing support. Loss of this level could invite more momentum sellers, especially if markets in general continue to struggle. If the $169 level is ceded, $166 is the likely next level of contention.

IBM stock chart view 1
Click to Enlarge

Regardless, unless our macro environment completely changes, International Business Machines should soon start finding buyers. So from here, I am more inclined to commit some risk into going long shares.

I’m conservative, though, so I’m not going to put $170 per share at risk to buy the stock straight-up. Instead, I want to use options so I can leave room for error.

How to Trade IBM Stock

The bet: Sell IBM Jan 2018 $135 naked puts for $3 per share. In this is a bullish trade, I have a 90% theoretical chance of success with IBM shares staying above my strike price. Otherwise, I will be put the stock and anything below $132 per share would accrue losses for me.

Given the size of the price buffer and the amount of time until expiration, I will not sell upside risk to balance this trade. I am confident that I will be able to manage the short term price gyrations.

It is important to note that selling naked puts is dangerous, and I only do it if I am willing and able to own the stock at the strike sold. I could take the edge off by buying cheap sacrifice May $135 puts for pennies to temporarily guard against the crash scenario regardless of how unlikely it may seem. After all, it’s smarter to wear the seat belt than think that I could click it on just before I crash the vehicle.

For a more conservative setup, I can turn this trade on IBM stock to one that has a finite risk profile.

The alternate: Sell the IBM Jan 2018 $135/$130 credit put spread. This sold spread has the same chances of success yet can still deliver 11% yield on risk.

Either case, I am not required to hold my positions through expiration. I can close them at any time for partial gains of losses.

Learn options as easy as 1-2-3 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/2017/04/go-long-international-business-machines-corp-ibm-stock-with-confidence/.

©2024 InvestorPlace Media, LLC