Don’t Be Afraid to Trade IBM Stock on This Dip

When Wall Street fears something there usually is an opportunity to make money. Long IBM is one of those easy trading ideas,

By Nicolas Chahine, InvestorPlace Contributor

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I’ve have been a harsh critic of International Busines Machines Corp. (NYSE:IBM) for a while. And I remained a skeptic of the recent Wall Street love for it. However, this didn’t stop me from sharing my bullish trades to capture many upside potential opportunities in IBM stock.

So to repeat what has already worked for me, I want to reload with another short-term bullish bet on this dip — emphasis on the word “bet.” This doesn’t mean that I’ve changed my opinion yet, but rather a risk on the price action of its stock.

My pessimism in IBM argument always involves the comparison of it to Microsoft Corporation (NASDAQ:MSFT). Mr Softie successfully adapted to the new tech age a while back. IBM has yet to do the same. Experts tell us that they have started to show signs of it but the proof will eventually be in the pudding.

In spite of that, recently Wall Street fell back in love with IBM. The stock has been an out=-performer in 2018 as it came into the earnings report up 10% year-to-date, which is better than the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).

Fundamentally, IBM is not bloated with a price-to-earnings ratio under 15. So owning the shares at a discount from here is not likely to be a major debacle. This is critical to my trade set up. It is now trading at the middle of the analyst price target range.

I also believe that expectations matter. Luckily, most analysts have a HOLD rating on IBM stock. So this makes the possibility of an upgrade surprise headline more likely than a downgrade.

Technically, there are two zones of potential support just below current levels. The first is around $158 per share and the second $7 lower.

So knowing that I have tangible value and technical support I am confident selling downside risk against them. In essence, I want to sell someone a lottery ticket designed to be a loser for them and a winner for me. I do the homework then let time do the work.

The bottom line is that it took IBM 23 quarters to break the declining revenue comps, and as a reward, the stock falls 3%. Logic suggests that there could be a bounce coming and I want to trade it on the long side.

No, I am not brave enough to risk $161 per share without any room for error especially that I still have to worry about the Buffet headline. Mid-February we will learn if he decided to sell more or all of his stock and that could cause another tizzy in IBM stock. So I will set my risk using IBM options where I can build a buffer zone.

The Bet: Sell IBM Feb 23rd $155 put. This is a bullish trade for which I collect $1.20 to open. I have a 80% certitude that I will retain maximum gains. But if price falls below my strike then I own shares. I would then need to manage off my break-even point of $153.80.

Selling naked puts carries big risk especially for a stock as potentially frothy as IBM. For those who want to mitigate it, they can sell a spread instead.

The Alternate Bet: Sell the IBM Feb 23rd $155/$152.50 credit put spread which would deliver over 15% in yield but with much smaller risk. Both setups have about the same odds of success.

It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for IBM stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.

Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.

Get my newsletter for free 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 as @racernic on twitter and stocktwits.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/dont-be-afraid-to-trade-ibm-stock-on-this-dip/.

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