China, China, China… U.S. equity investors have a love/hate relationship with the country as the emerging middle class consumer offers a massive opportunity for U.S. multinationals while on the flip-side the cooling economic growth rate and constant geo-political scuffles remind them of our nations’ frosty history. The recent allegations by the U.S. of Chinese industrial cyber-spying has launched the expected retaliations. Over the weekend it was reported that the Chinese government is “asking” their banks to remove IBM servers. While this is likely just posturing it does not come at a great time for many U.S. tech companies like IBM, CSCO and QCOM that already feel have specific competitive disadvantages in China like an already challenged demand environment. My sense is this blows over, but in the near term IBM’s stock is flirting with an important technical support level at $185 (red below), which also corresponds with its downward slopping 200 day moving average (yellow):
With no identifiable catalysts until Q2 earnings scheduled for July 17th, the stock is likely to trade on its technical set up, as it has remained fairly disconnected from the broad market (down about 7% from April highs while SPX is at new all time highs.
Whatever your view is, implied vol in IBM is quite cheap on an outright basis at multi year lows, not unexpected with the VIX below 12. But on a relative basis, to its realized volatility (how much the stock is actually moving) IBM options are cheapest in a long while. The one year chart below of 30 day at the money IV (blue) vs Realized Vol (white) shows this disparity:[caption id="attachment_40909" align="aligncenter" width="600"] IBM 1yr chart of 30 day at the money IV vs Realized from Bloomberg[/caption]
For those who think IBM holds at key support, but finds itself range-bound prior to its next earnings, financing already cheap calls could be the way to play for the event:
HYPOTHETICAL TRADE – Buy the June/July 190 call calendar for 1.70
– Sell to open 1 June 190 call at .80
– Buy to open 1 July 190 call for 2.50
Rationale – IBM isn’t likely to to reverse course here and go back to its 2014 highs, as any near term bounce would likely to find some sellers at the $190 level. The structure plays for that potential resistance and sets-up to own July calls which catch earnings and should see some demand prior to the event if the stock is still banging around these levels, which will help keep the July calls bid from a vol standpoint.
WE ARE NOT PUTTING THIS TRADE ON AT THE MOMENT FOR 2 REASONS, WE ARE NOT A FAN OF CURRENT FUNDAMENTAL BACK DROP, AND WANT TO SEE HOW THE STOCK ACTS HERE AT ITS 200 DAY MOVING AVERAGE. That said if the stock were to hold this is a pretty good options trade given the vol set up.