IBM's Earnings Blues Are a Big Opportunity
This simple options strategy pays investors to wait while Big Blue works through a sales slump.
When the stock market gives you lemons, make lemonade in the options market.
This approach can help offset an earnings disaster like the horrible quarter reported by IBM . Big Blue late Tuesday reported another quarter of disappointing results and the stock promptly shed 5% after hours. Wednesday, the stock is still trading lower, creating opportunities for long-term investors, and aggressive traders, to try to take profitable advantage of nascent market dynamics that will likely dictate how IBM's (ticker: IBM) stock trades until the next earnings report.
A particularly nettlesome data point in IBM's announcement was quarterly revenue, which logged its sharpest drop in four years. IBM is taking a $1 billion restructuring charge, and planning to reduce expenses by firing employees.
These actions and sour investor sentiment should conspire to keep IBM dancing around a trading range that investors can exploit by selling puts and calls with strike prices above and below the stock's price. Options sellers will receive money for selling the puts and calls that will help them offset recent losses.
With the stock down 3% around $182.46, investors can sell the February $175 put that was recently bid at $1.10. They can also sell the February $190 call that was recently bid at 60 cents. If the stock stays between $175 and $190, investors keep the $1.70 options premiums, which sweetens IBM's $3.80 annual dividend.
If the stock dips below $175, investors are obligated to buy the stock or cover the put at a higher price. Should the stock rally above $190, investors are obligated to sell the stock or cover the call at a higher price.
More aggressive investors can sell the February $180 put for $2.50, and the February $185 call for $1.78. The trade leaves little margin for error in the IBM trading range thesis, however, so be advised.
Over the past year, IBM's stock has ranged from a low of $172.57 in mid-October to a high of $215.90 in mid-March. It is hard to envision a scenario, given the recent earnings report, in which the stock surges sharply higher before the options expire Feb. 21. It is possible the stock will set a new annual low before expiration, but that doesn't seem probable since the stock pays a hefty dividend to yield-starved investors. Additionally, all of the bad news – and there is a lot – should now be priced into the stock, while legions of investors, including Warren Buffett, still consider IBM a key long-term holding.
The risks of the IBM trade are real, and worth taking. If you opt to execute the trades, consider the British Special Forces motto: Qui audet adipiscitur. Who dares, wins.