International Business Machines Corp. ( IBM ) has recently bounced, along with the general markets, from six-year-old support levels. 2016 has been good to IBM stock. Year-to-date, IBM stock has clearly outperformed the general markets.
Technically it now rests at important pivot levels. Fundamentally, it lacks reason for continued strength, so I want to take a bearish bet. The path lower seems easier from here.
IBM Stock Trades
Click to EnlargeTrade No. 1: Buy the April IBM $146 put. For this I pay $149 per contract. This is my maximum potential loss. To profit, I need IBM stock to fall towards my put strike or lower in the next few weeks. If so, my profits will be the difference between the cost of the puts and the new value.
Trade No. 2 : Normally I would want to reduce my out-of-pocket expense by selling calls to partially finance the purchase of my puts. This would add risk from potential losses if IBM stock rallies past my sold calls.
But even though I see no signs of imminent growth based on current management rhetoric, in this case I want to opt out of trade No. 2. I am willing to hold the risk via puts at least for the next few days. Selling calls is a risky proposition and requires margin. I usually avoid selling risk in headline-prone tickers or during earnings.
This is a medium conviction trade when considering IBM's prospect alone. But I also believe that markets in general are top heavy after this massive bounce. So overall, I would be most comfortable holding the puts even if they turn red for a few days.
I make sure to manage risk appropriately. Although I chose options that have quite a bit of time, I am not committed to hold them open for the duration. I can close any of these options trade for partial profit or loss.
Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities.
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