About a month ago we took a look at IBM and determined that the technical set up, the current fundamentals, the commentary from peers and most importantly the sentiment might have been so bad that it could be good for a bounce in the stock. On Sept 9th when the stock was $185 I bought an Oct weekly/regular 190 Call Calendar (below) in an attempt to play for some upward movement toward the strike and look to own calls for earnings Oct 16th (which fall in Oct regular expiration).
A couple weeks later with the stock hanging at my strikes after a quick bounce I thought the technical set up looked a bit weak and took profits on the trade (immediately below). Now with the stock down 6% in the last few weeks, and down nearly 5% on the year it could be a decent time to take another look at the stock from the long side.
The 3 year chart below shows just how important the $180 technical support level (white line) is for the stock. It’s a level it has not been below since Jan 2012), while the 200 day moving average (yellow) up at $198 should serve as fairly stiff technical resistance.
So here is the thing, I have no confidence that IBM is going to beat or even meet their prior guidance, but one thing has been certain in this bull run, pressing oversold stocks at inflection points has not been a winning strategy. For example, look at the 2 year chart of TOL below. Since making new multi-year highs in the summer of 2012, the stock has done a fairly nice job bouncing off of that level, even as each time looked like it was gonna be the big one. Well obviously the more often it does this, the greater the likelihood of a devastating break, but continuing to play for it would not be sticking with what has worked. On almost every occasion since late 2012 when TOL approached $30 it bounced more than 10% in the following weeks / months, 4 times.
I want to take a similar shot to what I did a month ago, now looking to capture a little premium in this weeks expiration and look to set up to own a near the money call for next weeks expiration that captures earnings.
TRADE: IBM ($182.55) Bought Oct 11th / Oct 19th Expiration 185 Call Calendar for 2.05
-Sold 1 Oct 11th (this Friday) 185 call at .55
-Bought 1 Oct 19th (next Friday) 185 for 2.60
Break-Even on Oct 4th Expiration:
Profits are maximized at 185 on Oct 11th expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Maximum risk is 2.05
Next Move: If stock is near or below $185 on this Friday’s close I will look to spread the next week calls by selling the Oct 19th 190 calls. The risk this week is if the stock sells off to 180 or below leaving the 185’s tough to spread going into next week.
Sept 25th: Trade Update $IBM: Closing Oct Call Calendar For A Gain
Since initiating this Oct/Oct call calendar, IBM went straight to my strike, then up another $5 and now back at the strike. With a little more to Oct 4th weekly expiration, the 190 strike that I am short, and almost a month to Oct 19th expiration what captures earnings the strike that I am long, I am going to take the profit on the position and look at the earnings event as we get closer.
Action: Sold to Close IBM ($189.25 ) Oct 4th/ Oct 19th 190 Call Spread at 2.05 for a .50 gain
While my max risk was 1.55, a .50 gain in less than 2 weeks beats a sharp stick in the eye, while I originally had the intent of turning this into an event/fundamental trade around earnings, I now see it as quick opportunistic options trade.
Original Post Sept 9th, 2013: New Trade $IBM: You’re my boy, Blue!
For the better part of 2013, large cap tech, particularly those companies with large (~50%) revenue exposure outside the U.S. and to businesses have under-performed the broad market (see IBM, EMC & ORCL). While these stocks are relatively cheap on a valuation basis, they are expected to get much of their future growth from emerging markets, which until recently have shown little evidence of a pick up in economic growth. Some of the recent manufacturing data-points in Europe and in China speak to stabilization, which could be all that some active money managers need to see in their desperate chase for performance. If the long period of U.S. equity out-performance to the rest of world is coming to and end, then we will likely begin to see flows in that direction prior to anyone ringing the bell!
On Friday in the MorningWord, I spoke to this point as it relates to IBM:
U.S. multi-nationals like IBM, (which is expected to grow earnings 10% a year for the next few years, trading at 10x that expected growth) which have severely lagged (down ~4% ytd) could offer a great deal more value on a relative basis as opposed to those sectors that have already benefited from the U.S.’s recovery and are not likely to see a material impact from the rest of the world coming off the mat.
While taking a contrarian view on when the market thinks the fundamentals will turn for IBM, taking a quick look at the 5 year chart of the stock (below) will not really help in an effort to make a bullish case:
The stock is at a fairly important inflection point, earlier this year breaking the uptrend that has been in place since the bottom in 2008, and now sitting on one and half year support. On a long term basis there is no real meaningful technical support for another 10% lower.
So looking down the laundry list of inputs we use, we have a very reasonable valuation, a poor technical set up, a mediocre at best fundamental positioning, low implied volatility and mixed earnings visibility.
The next real catalyst for the stock will be their Q3 earnings on Oct 16th. A quick look at how the stock has performed after the last 12 earnings reports shows an almost uncanny patter of up down up down for the last 3 years.
While that set up doesn’t speak clearly to setting up for a long trade into Q3 earnings, the way some very cyclical stocks are acting of late does. Looking at stocks like CAT & JOY today I wan to look for laggards that investors may rotate into if the global growth reflation theme catches a bit more momentum in the coming weeks.
The Trade that I am putting on does not have a ton of delta exposure as I want to set up for what I think the next catalyst will be for IBM, their Q3 earnings:
TRADE: IBM ($185 ) Long Oct 4th / Oct 19th Expiration 190 Call Calendar for 1.55
-Sold 1 Oct 4th 190 call at 1.10
-Bought 1 Oct 19th for 2.65
Break-Even on Oct 4th Expiration:
Profits are maximized at 190 on Oct 4th expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
Trade Rationale: The stock has recently bounced off of fairly key long term support, but still sorely lags the market and its peers. Given the potential for market volatility given the macro backdrop and the upcoming Fed meeting, my sense is that the prudent thing to do when initiating long biased trades into an earnings event is too look for ways to finance them. If the stock is below $190 on Oct 4th expiration then I will look to spread once more by selling a weekly or possibly turning into a vertical. This trade risks less than 1% of the underlying and offers me multiple ways to set up for a potential trade into Q3 earnings.