New Trade: IBM Q1 After the Bell, Our Preview, And A Defined Risk Way to Play For the Bulls

by Dan April 17, 2012 2:33 pm • Commentary

IBM reports its Q1 after the close tonight, the options market is implying about a 3% move vs the 4 qtr avg move of about 3.6%.

Sentiment in the name is fairly mixed among Wall Street analysts with 14 Buys, 14 Holds and only 1 Sell, while short interest is basically non-existent at about 1% of the float.

-As far as earnings growth for”Old Tech”,  IBM is in a fairly enviable spot, with expected growth this year and next of about 11%. which makes MSFT and INTC‘s low single digit expected earnings growth and DELL and HPQ‘s expected negative growth worse than anemic.  The stock’s valuation reflects this premium earnings growth trading at about 14x 2012, vs MSFT and INTC that both trade at about 11.5x 2012.

Price Action: The stock is up 12.5% ytd, outpacing the SPX but under-perfomring the Nasdaq which does not comes as a huge surprise given the stock general defensive nature.  Since making a new all time high earlier in the month, the stock sold off about 4%, and has recouped about half of those losses today.


April vol is pumped going into earnings, at 36 it is about double what July ATM options are trading and about 16 points higher than May. Skew is to the downside in all months with particularly elevated levels in April:

IBM Monthly vol skew from LiveVol Pro


From a historical vol view, Implied vol is alot lower than what we’ve seen over the past year but much higher than the actual volatility we’re seeing in the stock itself. Implied vol tends to go down to abut 16 following earnings reports:

IBM 1 yr HV vs IV from LiveVol Pro


MY VIEW:  I don’t have a strong opinion on direction, and the options appear to be priced in a fairly reasonable fashion.  If today’s price action is an indication of how we may trade after earnings season than I would expect priors leaders like IBM to make new highs on any good news in the weeks to come.

Due to the $5 strikes in IBM it makes it hard to trade “at the money”  so you may have to get a little further away from spot than you would like depending on the structure.

If you are Bullish on IBM, and the broad market in general, you could look to May expiration and Buy a Call Butterfly.

TRADE: IBM ($206.50) Buy May 210/220/230 Call Butterfly for about 2.00

-Buy 1 May 210 call for 3.10

-Sell 2 May 220 Calls at .60 each for a total of 1.20

-Buy 1 May 230 Call for .10

Break-even on May Expiration:

Profits btwn 212 and 220 make up to 8.00, profit trails off btwn 220 and 228, with max gain of 8.00 at 220 (up 6.5%)

Losses of up to 2.00 btwn 210 and 212 and btwn 228 and 230, with max loss of 2.00 below 210 and above 230.


Bloomberg’s Preview of the quarter:

April 17 (Bloomberg) — IBM reports today post-mkt:

• 1Q adj EPS $2.65
• 1Q rev. $24.8b
• 2012 adj. EPS $14.92, forecast “at least $14.85”

• Primary focus will likely be on revenue growth in software and services, services signings/backlog and margin expansion: Stifel Nicolaus
• Doesn’t expect material changes to guidance of “at least $14.85″: Stifel
• Expect IBM to marginally boost their guidance of at least $14.85: RBC Capital Markets

• IBM has met or beat EPS ests in 27 straight qtrs
• IBM has beat sales 7 of last 10
• IBM up 12.2% YTD; S&P 500 up 10.5%

• IBM reports tonight post-mkt, last 4x 4:03pm-4:12pm
• Conf call 4:30pm