International Business Machines Corp. (NYSE:IBM) is one of the leading companies in the tech-sector and one of the largest companies in the world. The company provides IT solutions and services to clients all over the world. The recent sell-off has increased the fear levels in the markets, with VIX climbing up to 40 – a level not seen in recent years. While commentators provide conflicting analysis and predictions – We want to suggest a high probability trade on IBM, one that could show profit even if the markets will continue to go lower.
IBM was in a long up trend from 2009 – 2014 as it managed to show higher profits, even with lower sales. It followed its business plan to increase the EPS to $20 (currently $15). However, during 2014 the company had announced that it won’t be able accomplish its goal and the share price took a hit:
(IBM Chart from 2009 till today. The red line is current price, the black line is the strike price – describes ahead).
We can see that the company is having difficulty to return to an uptrend. This is due to the weakness in it’s current business segments, and IBM’s difficulty to increase the the profits of its newer segments fast enough (it is a huge company and it takes time for the segments to gain the traction needed to ‘move the needle’ for this giant).
Even though the company is having a hard time to grow its profits – it is very profitable. And with the recent price drops the company is very cheap – the price-earning ratio is 9.5 – making it the second cheapest company in the sector. Further more the company is very investor-friendly with high buyback and dividend yields: The company have bought back more than 20% of its shares in the last 4 years.
Looking at IBM’s sales and EPS we can see that even though the company sales are declining the EPS is rising and remains flat over the last years.
Trade IBM by selling put on strike 130:
IBM is a quality company, and it is trading in compelling prices. However we see a better way to profit from IBM. Selling a put option on a lower strike. Since the option is out of the money we will receive a premium immediately, and we will have to buy the company ONLY if it declines further.
We think that selling on strike 130 provides ample protection and still very high yield. We think that it will be possible to sell the put for $130-$150 per contract for the next couple of days – representing more than 1% yield on invested capital (till october).
see an interactive chart on option samurai.
The advantages of the position:
- Higher probability of success.
- We gain another layer of protection – IBM could decrease another 10% and we will still be profitable.
- We profit with each passing day
- If we the strike is breach we will buy the company at even better prices – representing price earning ratio of 8.6.
The disadvantages of the position:
- The profit is limited.
- Each contract represents 100 shares of IBM so this position is not suited for small portfolios.
Traders can choose a higher strike and longer time to expiration to increase the profit.
- Find more Naked put trades here or look for short opportunities here.