International Business Machines Corp. (NYSE:IBM) shares have turned over a new leaf. The ailing tech company which rode the pine for much of this year’s bull market has finally been put in the game — and IBM’s initial performance deserves praise aplenty.
Driven by a surprisingly positive earnings announcement, Big Blue scored a one-day 9% pop that sent shorts running for cover. The significance of the rally was underscored by enormous volume that spurred IBM higher for three straight days.
With such a huge helping of gains, it’s no surprise that profit-taking finally entered the fray to knock the stock back down a few pegs. Over the past two days, IBM has retreated 4%, returning shares to the earnings gap.
Now it’s time to see just how aggressive dip buyers are willing to be. With such a strong jump last week, there’s no doubt this retracement will be bought. The principal question is when.
This morning’s selling has already carried IBM stock to the gap area. Often unfilled gaps become support, but so far sellers remain in control.
The next level of interest is $156, which represents a significant resistance zone from back in May and June. If the principle of polarity holds true, this old ceiling is also a potential new floor. After that, spectators should enter “wait-and-see” mode.
While some pessimists may be rooting for IBM to fill the entire gap, I’m willing to bet we only see a partial fill, and that has me eyeing this pullback with interest for deploying bullish trades.
The Bet-IBM-Won’t-Fill-the-Gap Trade
To provide the best chance of success, I like selling bull put spreads here and scaling in. An out-of-the-money bull put always carries a high probability of profit, but by scaling in, we allow ourselves two chances to nail the bottom of the current pullback.
Sell the Dec $150/$145 bull put spread for 79 cents. Enter half of the position now and then look to enter the second half if the bull put rises in value to $1.15. This will raise your average credit, allowing you to profit quicker once the next upswing for IBM takes root.
As of this writing, Tyler Craig didn’t hold any positions in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
