IBM has been a battleground stock for the past few years, in sharp contrast to the broader market, which has been in a steady multi-year uptrend, with the SPX hitting a new all-time high today.
We discussed our views on IBM in a NTT post last week (included below), with the following conclusion:
We are not entering this trade today given the need to time entries quite well on the bearish side in this market. But if IBM does get up to its 200 day ma, we might pull the trigger on this structure:
Hypothetical Trade: IBM ($185.50) Buy the Apr4th 190/180/170 Put Butterfly
This put fly is currently priced around 3.50, but would probably be cheaper by around 0.50 if IBM rallied to 187.50 in the short-term. The structure expires before April earnings, for which we would not want to hold this rangebound position. We’ll keep an eye on it for now.
With IBM back up to near $187 today, we’re going to initiate this position this afternoon for $3.20:
TRADE: IBM ($186.75) Buy the Apr4th 190/180/170 Put Fly for $3.20
– Buy 1 Apr4th 190 Put for $4.95
– Sell 2 Apr4th 180 Puts at $1.00 each ($2.00 total)
– Buy 1 Apr4th Put for $0.25
Break-evens on Apr4th expiration:
Profits: btwn 186.80 and 173.20 make up to 6.80, with max gain of 6.80 at 180
Losses: losses of up to 3.20 btwn 170 & 173.20 and btwn 186.80 & 190 with max loss of 3.20 below 170 or above 190
Trade Rationale:
We laid out the thought process on this trade last week in the NTT post, and with the stock up near our target today, right below the 200 day ma, we’re going to take our shot on the put fly, playing for a move down to the low 180’s over the next few weeks.
Original Post February 27, 2014: Name That Trade $IBM – Big Blues
Bloomberg News had an article this morning with the headline, “IBM Begins Cutting U.S. Jobs in $1 Billion Restructuring” – what a surprise. The article states:
IBM is aiming for $20 a share in adjusted earnings by 2015, up from $11.67 in 2010 — a target made more difficult by seven straight quarters of falling revenue. To get there, Chief Executive Officer Ginni Rometty has fired and furloughed workers, sold assets, cut IBM’s tax rate and bought back shares.
We have written on several occasions in the past few months about IBM’s flat 5 year sales trend, vs. doubling headline EPS in that period. It takes a lot of cost cuts, accounting adjustments, lower tax rates, and lower share counts to achieve such a feat.
Back in early January, with the stock around $190, I wrote the following in a Name That Trade post:
Moreover, the inability to grow sales is a concern for any large tech company, especially since the tech industry backdrop is so frequently changing.
Yet, IBM’s relative valuation does certainly suggest low expectations in 2014 vs. many of its peers. The stock has had some legs ever since ORCL’s strong quarterly report in December.
Add it all up, and I am of the view that IBM is unlikely to see much of a rally in 2014, but also unlikely to see a precipitous fall.
Later that month, we put on a put butterfly position that turned out to be a nice gain. IBM has climbed back to near its 200 day ma once again in the past couple weeks, a level that served as resistance when I first wrote that post in early January:
IBM daily chart, 200 day ma in yellow, Courtesy of Bloomberg
The 200 day moving average, now around 187.60, happens to coincide with where IBM closed the year in 2013, at 187.57. As a result, we view that level as strong resistance.
Not much has changed fundamentally for IBM after their disappointing earnings report in January. Analysts still project 10% earnings growth for 2014, on a slight decrease in sales vs. 2013. With that fundamental backdrop, and the long-term technical downtrend, our overall trading view from early January still holds – look for rangebound price action with a bearish bias in IBM near the top of the downtrend.
We are not entering this trade today given the need to time entries quite well on the bearish side in this market. But if IBM does get up to its 200 day ma, we might pull the trigger on this structure:
Hypothetical Trade: IBM ($185.50) Buy the Apr4th 190/180/170 Put Butterfly
This put fly is currently priced around 3.50, but would probably be cheaper by around 0.50 if IBM rallied to 187.50 in the short-term. The structure expires before April earnings, for which we would not want to hold this rangebound position. We’ll keep an eye on it for now.