Trade Update IBM: Closing Month Old Put Spread for Nickel Loss Before Earnings

by CC April 16, 2012 3:38 pm • Commentary

Trade Update: April 16th

With IBM down slightly since we put this trade on, we’re going to sell out of the spread going into earnings for a small loss at .95. (stock reference 204.34) The reasoning is the move we wanted to see out of the stock off its highs hasn’t happened, and without any insight into earnings and with the chance of the market and IBM stock opening up tomorrow, we though best to get out for close to even and see if a better opportunity presents itself.




Original Trade: March 15, 2012 

IBM is up 11.7% ytd, and frankly I am just sick of these runaway breakouts from some of these multi-nationals that may see some serious headwinds from currency fluctuations and the potential of slowing demand from China, oh and I almost forgot, a recessionary environment in Europe.  

TRADE: IBM ($205.55) Bought the Apr 200/195 Put Spread for 1.00

-Bought 1 Apr 200 Put for 2.24

-Sold 1 Apr 195 Put at 1.24

Break-Even on Apr Exp:

Profits btwn 199 and 195 make up to 4.00, max gain of 4.00 at 195 or lower.

Losses of up to 1.00 btwn 199 and 200, with max loss of 1.00 above 200.


Trade Rationale:

-stock is trading at all time highs and obviously being treated by investors as a safe-haven in tech, or the broad market as a whole.

-Oddly the analyst community is fairly mixed on the name with 14 Buys, 15 Holds and 1 Sell and an avg 12 month price target of ~$200.  Short interest is nonexistent at about 1% of the float.

-Stock aint exactly cheap to its 5 yr avg, trading at about 13.8x 2012 earnings that are expected to grow at only about 11%.  I guess the hitch here is that sales are only expected to grow at 2%.  At current valuation the stock may be priced for perfection at current levels.

-I am focusing on Apr as it will catches their Q1 earnings release, any disappointment on forward guidance and this stock should pull back to at least the break-out level of 200/195, that’s why i am focusing on such tight strikes.  This trade breaks-even down 3% from current levels.

-Even though this is a cheap stock, I think there is a lot of good news already priced into it.