With a well-received earnings topper out of the way, it’s time to go long International Business Machines Corp. (NYSE:IBM). But to capture some big green in Big Blue with less potential red ink, a hedged bull call spread strategy on IBM stock makes sense. Let me explain.
Let’s just say that not everyone is impressed with IBM stock’s earnings report last week. But despite logging its 22nd straight quarter of declining revenues and an item sure to irk some bears; the market’s forward-looking pricing mechanism has spoken strongly in favor of better times ahead for Big Blue.
Much of the enthusiastic reaction likely has to do with IBM stock beginning to see traction for future sales growth. Bottom-line, despite the aforementioned consistency in declining revenues, the fact is IBM did beat forecasts by 3% and managed to surprise in its emerging cloud-computing business.
Some of that optimism may have investors also considering another growth initiative, blockchain technology and its potential for a large payoff. Wall Street’s latest buzzword and the driving force behind cryptocurrencies like Bitcoin is already being used by IBM to help underdeveloped countries build their global trade opportunities.
IBM Stock Weekly Chart
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Since reporting IBM stock has demonstrated a strong, bullish shift in character by clearing a couple key bearish gaps established earlier in 2017 which reversed an important downtrend breakout from late 2016. As well, last week’s price action also easily cleared the extended downtrend line as shown in the provided daily chart. That’s bullish.
Additionally and also supportive, IBM has re-entered bull territory by reclaiming the 200-day moving average and pushed past the 50% retracement level while showing clear and surprising signs of momentum in trading outside its upper Bollinger Band for three sessions.
Looking forward and after a long period of underperformance, the ‘second attempt’ breakout looks promising given the priced developments of the past couple days. Do I expect the current momentum to continue? Probably not. But the price action does hint strongly at the increased likelihood of outsized returns in a stock much less extended than the broader market.
IBM Trade
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Specifically, the slightly out-of-the-money Dec $165/$170 call vertical for $1 with shares at $162.07 looks attractive.
For a modest 0.60% stock risk this bullish IBM options trader has the opportunity to capture $4.00 above $170 at expiration for a max return of 400%. To capture the return IBM stock would need to rally by 4.9% for the period; which in the past might seem unfathomable.
However, given what’s been discussed and possible reboot in progress, Big Blue can easily continue delivering the color of money for bullish investors.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
