Are you feeling down on Big Blue? Turns out you’re not the only one. IBM (IBM) officially entered the Street’s dog house last year and has yet to depart.
You would think IBM stock would have to be the worst performing component of the Dow Jones Industrial Average, but, no. That award goes to Walmart (WMT), which is down 29% year-to-date (IBM stock is only down half that).
IBM’s slide has presented bears with opportunities galore along the way. Each and every rally has been denied in short order, while signs of hope have been dashed by disappointing earnings.
Interestingly, IBM has rallied during the weeks heading into its last two earnings announcement. Chalk it up to short covering or perhaps bargain hunters hoping all that ails IBM has been priced in.
Unfortunately, the perception of a better future has been shattered by the reality of dismal earnings.
IBM Stock Chart
From a charting standpoint IBM stock has rallied nicely this week forming a classic bear retracement setup. These counter-trend rallies provide low-risk entries for sidelined bears looking to get in on the action.
And now’s as good a time as any to pull the trigger.
Option premiums are relatively cheap for IBM stock, making long put spreads an attractive play for scoring on further weakness. I recommend buying the Jan $135/$130 put spread for $1.45. The vertical spread consists of simultaneously buying the Jan $135 put and selling the Jan $130 put.
While it caps the profit potential, the short $130 put also drastically reduces the cost and risk of the position.
The initial $1.45 net debit represents the max risk in the position and will be lost if IBM stock sits above $135 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $3.55, and will be captured if IBM stock price can fall below $130 by expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.