IBM's High Momentum, Low Value, Improving Profit Might Make It A Buy, Covered Calls, Puts Options Trade

I cover what I’m trading and how I’m looking at stocks and options. I can’t predict markets, stock prices or interest rates. Nobody can. All we can do is trade.

By Donald E. L. Johnson

Cautious Speculator

• IBM reported bullish earnings, and the stock is dipping a bit after a post-earnings report rally.

• Investors seeking to enhance their dividend income by selling covered calls and/or cash secured puts might like trading IBM and its options.

• In addition to good momentum, IBM looks pretty under valued.

• Charts are mixed.

International Business Machines (IBM) appears to be a potential restructuring and turn around story that has its shareholders looking for better days. It opened Thursday down a little then quickly hit a day’s high of $134.75 and now is $132.44, slightly off its low.

The questions investors face are: buy the stock, sell cash secured puts (a bullish trade), do a covered calls trade, buy leaps options or wait for the markets to bottom out before doing anything?

Income and total returns traders who like IBM’s 4.96% dividend and its momentum probably are itching to buy the stock. Indeed, the StockChartsTrend Rating (SCTR) on the stock is a very bullish 76.3. A SCTR above 60 is considered a buy by traders who use charts and momentum indicators to pick stocks and entry points.

IBM’s daily price chart shows mixed indicators. The parabolic sar momentum just turned bullish. IBM’s Chaikin Money Flow (CMF) indicator suggests that institutional portfolio managers are buying the stock. But the stock opened today down for the second day in a row and the MACD oscillator still is bearish.

Fundamentals

Fundamentally, IBM is one of the cheapest stocks in the Dow Jones Industrials 30 index (DIA). That is, its price/free cash flow (P/FCF) ratio is 11.6, compared with the index average of 21.6, according to the StockRover.com table.

IBM reported strong fourth quarter earnings.

With the stock’s price at $133.31, it is trading at 76% of the $174.74 academic fair value estimate (FVE)  and 10.9% under the $148.1 mean consensus target prices published by sell side analysts, who historically are too optimistic at this time of year. The highest analysts’ price target for IBM is $170.

Trades

Investors who own or buy IBM can sell IBM 2.18.22 (22 day) expiration $134 strike covered calls for $3.25, or about a 37% return on risk (RoR). There is a 48% chance (delta .48) that the stock will close on Feb. 18 at least a penny over the $134 strike price and be assigned, or called. The RoR offers a nice but not huge immediate cushion. But if a trader does the trade repeatedly over a year, the cushion or hedge would be about 30%, depending on what happens to the stock price. These numbers fluctuate with stock prices. They are the ones I check.

A trader who wants to hold IBM long term and at the same time could buy the stock and sell (write) IBM 2.11.22 (15 days) $144 calls for about $0.36, or about a 6.15% annualized RoR. That plus the dividend would produce a total annualized RoR of around 11%, not including potential gains or losses in the stock.

Another way to reduce the risk of having the stock called or having puts assigned is to sell very out of the money (OTM) calls and puts.

Thus, a speculator could buy IBM for $132.53 and sell one or more IBM 2.11.22 $148 calls for about. $0.07 per share, or a 5.6% annualized RoR. Then sell one or more IBM 3.11.22 (43 days) $123 strike cash secured puts (CSP) for about $0.58, or a 11% annualized RoR. The dividend income of about 4.96% (at the moment) plus 6.15% covered calls premium income plus 5.6% puts premium income would provide a total annualized return of about 16.6%, plus or minus the stock’s gains or losses and options trading commissions.

Leaps are long term options trades. At this time of year, most leaps traders would look at buying IBM 1.20.23 (358 days) $125 calls for about $15.80 per share on a 100-share option. The idea is to buy about a delta .60 call option, OptionPlay.com’s chief strategist, Tony Zany, recommended in a recent YouTube video. This trade is at delta .59, which suggests there is a 59% probability that the call will be exercised, which is what investors want. Delta .59 also indicates that for every dollar the stock moves, the option will change 59% of that dollar, or $0.59 cents.

What they really want is a quick rally that gives them a quick 50% to 100% profit that they can take and do a new trade or move on.

This leaps trade requires investing 100 shares times $15.80 per share instead of times $132 per share. When doing trades, try to get a fill at the mid point between the bid and ask price on a stock or option.

The poor man’s covered call trade on IBM would be to buy the January, 2023, call option and sell monthly covered calls against it to generate income and lower the net debit on the trade. For example, sell IBM 2.18.22 (22 days) $143 strike (delta .10) calls at about $0.38. Traders willing to take more risks of having this call exercised might sell delta .15 to .20 February calls. Everyone’s risk tolerance and financial situation is different.

Beware

Like all investing, trading stocks and options is risky. If you can’t sleep with market risks, let someone else or mutual funds do your trading. I'm an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I reserve the right to trade any of the listed stocks at any time. I do not own and or have options  on the stock mentioned in this article.