Event: IBM reports Q3 earnings after the close tonight, the options market is implying about a 4% move, which is basically in line with the 4 qtr trailing avg move of about 3.2%.
Sentiment: Wall Street analysts are fairly mixed on the name with 15 Buys, 17 Holds and No Sells, with an Avg 12 month price target of about $220. Short interest sits at a mere 1.35% of the float.
Volatility: Oct weekly vol in IBM sits ~40 atm, which is twice what the out months trade at. Following earnings events vol across the board tends to settle in the mid to high teens, so with Nov atm at ~18 there won’t be much of a vol collapse in out month options. The weeklies are pricing in about a $6.50 event move. Here’s a look at 30 day implied vs 30 historical against 360 day averages:[caption id="attachment_18057" align="aligncenter" width="654" caption="HV vs IV from LiveVol Pro"][/caption]
Skew within months, as always, in to the downside:[caption id="attachment_18058" align="aligncenter" width="574" caption="Skew from LiveVol Pro"][/caption]
Vol in Nov and out seems like a safe hold and the way to play from a long premium perspective. Selling the Oct weeklies is tempting as well, but IBM has moved in the past on earnings, so carries some risk of an outside move.
Price Action/Technicals: The Stock is trading about 1% from an all time high made earlier in the month, and now sits up about 14.5% on the year and up 16% from the July lows.
Looking at the charts, there isn’t much to not like, the stock has had a steady build back to the previous highs and now sits right at a fairly important break-out level.[caption id="attachment_18068" align="aligncenter" width="490" caption="IBM 1 yr chart from Bloomberg"][/caption]
Looking back to the 2009 lows, the stock has been a massive out-performer to most Old Tech names up nearly 100%, and holding the uptrend that has been in place since Sept 2009.[caption id="attachment_18070" align="aligncenter" width="490" caption="IBM s yr chart from Bloomberg"][/caption]
My View/Expectations: The company doesn’t really give specific forward guidance, but they are likely to tweak the previous eps range. If the company is able to manage eps to inline or slightly better and not miss sales by more than a couple % I would expect a fairly muted reaction to the results.
Investor concerns once again center around exposure to Asia and Europe and to U.S. Enterprise, but with almost 50% of their sales and 60% of their earnings recurring the company is likely to be able manage their results a bit better than some of their tech peers.
Aside from taking a directional view, I don’t see any real edge in the options, buying the Oct 210 Straddle (stock ref 210.50) paying about $6.50 seems pretty fair to be honest.
From a Directional standpoint:
-If you were bearish and wanted to play for ~5% move lower on earnings, you could buy the Oct 205/200 Put Spread for .75 (stock ref 210.55) the break-even is 204.75, down about 2.75%.
-If you were bullish and wanted to play for ~5% move higher on earnings, you could buy the Oct 215/220 Call Spread for .90 (stock ref 210.55), the break-even is 215.90, up about 2.5%.
I DONT HAVE ANY REAL CONVICTION EITHER WAY, I AM GOING TO AVOID, BUT IF I DID, I WOULD CONSIDER A DEFINED RISK, TIGHT VERTICAL SPREAD TO EXPRESS THE VIEW, RISKING WHAT I WAS WILLING TO LOSE.
Bloomberg IBM quarterly Preview:
PREVIEW IBM 3Q: Update on Year Forecast, Currency, Software
2012-10-16 18:51:27.291 GMT
By Brad Skillman
Oct. 16 (Bloomberg) — IBM reports after the close, likely
to update year EPS forecast. Focal points may be software
performance, mainframe product, Stifel says. Expect no big
surprises, Bernstein says.
* 3Q adj. EPS: $3.61 ($3.51-$3.69)
* 3Q rev.: $25.36b ($24.97b-$25.71b)
* Yr adj. EPS: $15.14 ($15-$15.30); in July, IBM saw at least
WHAT TO WATCH:
* Currency may affect revenue; last qtr, currency hurt revenue
growth by $1b. Weaker dollar vs euro since beginning of qtr
providing some cushion to rev. estimates, Bernstein (market
* Software (~24% of rev.) underperformed last qtr, Stifel
(buy) says; comparisons remain difficult in 2H though should
benefit from acqusition activity, “transactional sales
* Hardware commentary may be key with new mainframe expected
to ship 4Q, Stifel says; IBM has outperformed S&P 500 over
12 months during last two mainframe product cycle releases
* Bernstein sees total signings $13.4b ($6.1b in short-term
signings, $7.3b in long term)
* IBM implied one-day price move after earnings: 3.9%. Shrs
have gained 4 of past 8 days after earnings
* EPS has beaten est. every qtr since 1Q 2005: Bloomberg data
* IBM has reported between 4:03-4:12pm in past 4 qtrs