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

by Dan October 18, 2011 9:12 am • Commentary

Update Oct 18th, 2011 at 10;30am: With the stock at 177 down 5% I sold my put spread at $4.30….I have closed this position and will now focus on the Main Event…..AAPL tonight….check back for an update on my AAPL trade from Friday….


Update Oct 18th, 2011 at 9:25am:

After issuing disappointing Q3 results, IBM is trading down about 4.5% in the pre-market at about 178 from a 186.59 close…..With 4 trading days to expiration I will look to lock in some gains on a portion (1/2 to 2/3) of the OCT 185/180 Put Spread that I bought on Friday for 1.05…..On Friday’s close the spread would be worth 5.00 if the stock is 180 or below….but at this point that is clearly a big IF. I think it is prudent to take half off for 4.00 or more….and then look to see if the stock settles in below 180 (the put strike I am short) and ride the balance through expiration….but remember, what ever the spread is worth on the open with the stock below 180 I am now risking that amount to make the full width of the spread on Friday’s close….the risk reward may not be there in a market as whippy as this….


ORIGINAL POST  OCTOBER 14, 2011 11:07 AM: IBM – I Want To Fade This Run-Away Break-Out Into Q3 Earnings Print

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.