After closing a profitable bearish trade in IBM into their Q1 print (bottom of page from April 14th), we wanted to roll the bearish view out a bit as the results and commentary in our opinion should have caused the stock to retrace a bit more of the stock’s rally off of the February lows. Well that wasn’t the case, and the stock quickly filled in the earnings gap, making our trade nearly worthless. IBM is down 3.5% from last weeks highs, and back to the level where we bought the May Put Fly. While my view on the stock has not really changed as it relates to their results, the price action, or rather, the buy interest that appears to be a continuation of the rotation out of high valuation and into more defensive tech as caused me to want to be out all together of the position and possibly wait for a better entry on the short side.
Action: IBM ($190.34) Sold to Close May 190/185/180 Put Fly at 1.10 for a wash
Previous Post April 17, 2014: New Trade – IBM: Rolling Bearish View
Last week we placed a near term bearish trade in IBM after its 15% rally into last night’s Q1 report on the belief that the results would not support the stock’s recent strength (see below). We isolated the target range on the downside in line with the implied move of about 4%, or $190, which we also thought should serve as near term technical support. Earlier this morning we closed the trade when the stock was near the lows of the session as we were worried that if the stock got ugly as the day went on our profit potential would decrease, so we booked the gains. The stock appears to be pinned to $190 and we will likely close today very near that level as the April 190 puts represent the single largest line of open interest.
With the stock about 1.5% higher than where we closed our April put butterfly, we want to now roll the bearish view with the thought that those who bought the stock over the last 2 months will continue to exit the trade. Additionally, the six month chart below shows a pretty interesting technical support level at $185 (red), which happens to be just a tad below the 200 day moving average (yellow):
I now want to roll this bearish view, but with a slightly less aggressive target. I also want to look for the lowest premium way to target the $185 level over the coming weeks:
TRADE: IBM ($190) Bought May 190/185/180 Put Fly for 1.08
-Bought 1 May 190 Put for 3.80
-Sold 2 May 185 Puts at 1.75 each or 3.50 total
-Bought 1 May 180 Put for .78
Break-Even on May Expiration:
Profits: btwn 188.92 and 181.08 make up to 3.92 with max gain of 3.92 at $185
Losses: btwn 188.92 & 190 lose up to 1.08, btwn 181.08 & 180 lose up to 1.08, below 180 and above 190 lose full 1.08
Rationale: Investors were not happy with the results that IBM just released and the shares could continue to be under pressure for the next few weeks. This structure offers a low cost way to play for follow through weakness. If the stock does appear like it will hold the 190 level and continue higher we’d likely stop the trade out at a 50c loss.
Previous Post April 14th, 2014: IBM Trade Update – Closing April Put Butterfly for a Triple
With the stock in between our profitability range $184.05 and $195.95 and hours to expiration, we are going to take the profit and not wait till the close (which is expiration) to try to achieve the full profit potential of the butterfly.
Action: IBM ($187.70) Sold to Close April 19th (today) 197.50/190/182.50 Put Fly at 4.70 for a 3.15 gain
Considering Our Options, April 16th, 2014 – $IBM Earnings Trade
About a week ago we made a near term bearish trade in IBM (below) when the stock was about $1.50 higher that specifically was isolating tonight’s earnings event. We don’t normally do outright directional trades into earnings because, well its a very hard way to make a living, and this one, less than 2 hours from the event is no different.
Let’s breakdown our prerogatives. The put fly we are long expires on tomorrow’s close, 24 hours after the company reports, which makes the event fairly binary. So to make money, we need to get direction right, magnitude of the move right, and timing. We could be right on all in 2 days and it wouldn’t make a difference, we could lose all of the premium at risk tomorrow.
So our decisions at the moment are:
1. Take small gain and avoid what could be fairly binary risk into tonight’s print, or
2. Roll the bearish view out to May and give ourselves more time for thesis to play out, or
3. Let em fly and risk what we are willing to lose.
At this point with the stock just above the break-even, I think it makes sense to hold the position as we are basically at the money, and have a range below to make up to 4x our money on a downside range of 196 to 184, while on the upside I can lose the full premium up a few percent. One caveat is that INTC’s performance today spooks me a bit with the stock unchanged on a mixed qtr and outlook, this could be a distinct possibility for IBM tomorrow. Given the stock’s recent strength that I believe is more reflective of a rotation rather than a fundamental change, I am going to opt for door number 3.
For those who have similar positioning with little time to heal any and all wounds, and lean more to be risk adverse, this is one you probably want to pass on, but I have risked what I am willing to lose.
Original Post April 10th, 2014: New Trade $IBM: Blue Steal
Last month when IBM was $186.75 we made what was in hindsight a poorly timed short term bearish trade that hoped to capture a consolidation of some of the stock’s recent gains, to no avail. The stock apparently has been benefiting from the continued rotation out of of high growth/valuation tech into slower growth/ lower valuation defensive old tech. The stock is up 1% today, and almost 6% on the year, outperforming the broad market (to be fair it massively underperformed the S&P500 in 2013).
IBM has bounced 15% since mid February, from an apparent triple bottom in the mid $170s, and now approaching the psychologically important $200 resistance level:
From where we are sitting we see little by way of fundamental news to cause the new found investor interest in the shares, especially when you account for the late March results from ORCL. Our take on IBM’s earnings and guidance from late February:
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.
Analysts expect sales to decline in 2014 for the third consecutive year, with only low single digit growth thereafter. It is our view that the earnings growth that they do have (expected 5% this year and possibly 11% next) is highly manufactured, which is why we don’t see the stock trading at a market multiple again any time soon without the company demonstrating organic growth. We do not believe IBM’s Q1 results will be enough to hold recent gains, and while the company does not give detailed guidance they will likely touch on their prior full year estimate of at-least $18 a share in earnings for 2014.
Despite being wrong last month, we are nothing if we are not persistent and once again want to make a defined risk bearish bet that next week’s Q1 results will not support the stock’s recent strength. The options market implies about a 4% one day move following the April 16th results, which is a bit shy of the 4 qtr avg one day move of about 4.8%.
We want to play for a near term re-tracement back towards $190 in line with the implied move for earnings.
TRADE: IBM ($198) Bought April 19th (next week) 197.50/190/182.50 Put Fly for 1.55
-Bought 1 April 197.50 Put for 3.87
-Sold 2 April 190 Puts at 1.37 each (2.74 total)
-Bought 1 April 182.50 Put for .42
Break-Even on April Expiration:
Profits: btwn 195.95 and 184.05 make up to 5.95 with max gain of 5.95 at $190
Losses: btwn 195.95 & 197.50 lose up to 1.55, btwn 184.05 & 182.50 lose up to 1.55, below 182.50 and above 197.50 lose full 1.55
Rationale: I want to isolate next week’s earnings event on Wednesday as the catalyst to send the shares back to near term technical support at $190. Options are getting a tad expensive for the event which is why I chose a fly which offers a healthy risk reward on a down move in line or slightly greater than the implied move.