IBM – I Want To Fade This Run-Away Break-Out Into Q3 Earnings Print

by CC October 14, 2011 11:07 am • Commentary

IBM reports 10/17 after close. The options market only implying 3% move. The 4 qtr average is about 3.25% The stock up 28% vs Nasdaq unchanged on the year. The Street is oddly mixed on the name with 17 buys and 13 holds, no sells. The stock is trading at all time highs and is 20% off the August lows. The average 12 month price target is about 192,  just a percentage point away.

Stock trades at about 14x next year’s expected earnings, and while not overly expensive, it trades at a premium to the S&P 500 multiple of about 12.6x, which it hasn’t done to often in the last decade.

I think the stock is ahead of itself I want to make a short term bearish bet (while defining my risk) that the stock can sell off 3-5% in the next week. So here’s the trade:

IBM (188.85) Buy the Oct 185/180 put spread for 1.05

-buy oct 185 put for 2.00

-sell oct 180 put at .95

Break-even on Oct exp (next friday):

Profits: btwn 183.95 and 180 make up to 3.95 below 180 make 3.95…

Losses btwn 183.95 and 185 lose up to 1.05… above 185 lose 1.05

TRADE RATIONALE: This is a sentiment trade, the quarter is likely to be fine and commentary OK. But all the good news in stock at current levels. I DONT BUY RUN AWAY BREAKOUTS. I like the almost 4 to 1 payout potential.