Blues Clues: $IBM

by CC April 18, 2016 2:11 pm • Commentary• Trade Updates

Reminder: We’ll be hosting a webinar on Tonight at 8pm that concentrates on investing and trading during earnings season. If you haven’t already, register here. Dan will be discussing IBM’s earnings, due after the bell, on the webinar and comparing the inputs we used to what actually transpired.


Earlier today Dan posted a thorough preview of IBM’s q1 results, due after the close. We wanted to look over some options trades for those that are already long the stock, or those that want to be long the stock but with defined risk.

In a nutshell IBM stock has consistently reacted poorly to earnings reports over that past 2 and half years:


Will tonight break the trend or can more pain be expected? It’s best not to guess and be prepared either way. So let’s first look at protection for those long the stock in their own portfolio.

As Dan mentioned, the implied move is about $7 in either direction. But those looking to protect a long may want to look lower than $145 as potential risk. The converging 50 and 200 day moving averages are closer to $140.

From Bloomberg
From Bloomberg

We can protect against a decline like that while only risking 1% of the underlying, for those willing to be called away in the stock up $10  

Against 100 shares of IBM ($152.50) Buy the April22nd 150/140/130 put butterfly for 1.60

  • Buy to open 1 April22nd 150 put for 2.35
  • Sell to open 2 April22nd 140 puts at .40 (.80 total)
  • Buy to open 1 April22nd 130 put for .o5

Rationale – Costing about 1% of the underlying this overlay vs long IBM stock offers downside protection starting about 2.5% lower with a breakeven at 148.40. The trade-off is that protection starts to trail off below 140 and this protection actually costs money (on top of the losses in the stock) below 131.60, but that’s a long way from here. If the stock goes nowhere the butterfly becomes worthless, so this is for those that think the stock has more upside after its recent bounce, or are in it for the long term, but want protection close by on the downside and are willing to risk about 1% of the underlying to protect in case of any move towards 140. For those concerned about moves below $140 vs long stock this can simply be a 150/140 put spread for .35 more.

Now what about those looking to be long but with defined risk? That’s certainly prudent given the recent run higher in the shares into what has not been a kind event to IBM over the past 2 years. If you want to get in IBM for a sustained turnaround for the company, you want to define your risk for sure:

In lieu of 100 shares of IBM (152.50) buy the April22nd 152.5/165 call spread for 3.00

  • Buy 1 April22nd 152.50 call for 3.20
  • Sell 2 April22nd 165 calls at .20

Rationale – This trade breaks even at 155.50 (up $3 vs the $7 implied move) so it will be profitable fairly quickly on the upside) and targets a fairly hefty move higher with a max gain possible at 165 in the stock (up ~10%). Where this trade is probably better than stock is on the downside as a move lower on the implied move this trade only loses $3 vs the $7 in the stock. And a big move lower by more than the $7 and this is a much better trade than being long stock. If you do get the move higher on earnings the call can either be rolled or will become long stock after this Friday, and can be spread out in May where the dividend is collected in the beginning of the month. If the stock goes sideways or slightly down the entire $3 can be lost vs smaller losses in the long stock but that’s the price of having defined risk vs long stock.