Big Blue (IBM) Is Topping, What Now?

| April 10, 2012 | 0 Comments

IBM put optionsFor those of you who don’t know, by learning to trade options, you can profit when a stock falls.

It almost sounds a little twisted, but it’s true.  A company’s misfortune can spell big profits for you.

Here’s the deal…

Let’s look at multi-mega cap tech giant International Business Machines (IBM). 

Since the beginning of the year, IBM has stunned investors.

It started the year around $190 a share and hit a high of $210.69 last week.  That’s a huge 13% increase, especially for a slowly-advancing tech stock.

However, even proponents of IBM are now getting skeptical of this advance.

The market seems to be topping. The S&P continues to struggle holding the 1,400 level.  And IBM is now showing reversal signs, closing down Thursday to $205.77.

The fact is, the parade could be coming to an end for Big Blue.

You see, one very important technique used by option traders is to be able to analyze a chart.  Traders use this information to pick an options strike price and month that’ll return them profits.  And that’s what it’s all about! 

But let’s get back to that in a moment…

Technically, IBM is beginning to send off some bearish signals.

Let’s take a look at a chart… and begin a brief analysis.

IBM Options

The reversal in the shortened week last week could be the first stage of an overdue pullback.  Last Monday the stock reached a fresh rally high of $209.69.  It then extended gains the following day reaching the multi-year high of $210.69.

Now, I expect IBM to work through a rocky pullback in the next two to three months.

However, this impressive bull run has left behind a few layers of key support. The initial level of a pullback will come near the March levels around $200 a share.

A fall beneath this could technically send shares down around the $195 or the $193 level.  Any lower than this could REALLY send the shares spiraling downward.

So, how do you use this information to make money?

Considering option trading is filled with so many nuances, I’m going to give you three simple steps to make the most of this charting technique…

First, when looking at the chart, you need to give yourself enough time for the stock to retreat to its support lines.  In this case, since there aren’t any two month options, you’ll look at the July options.  This will give you a little bit more time for a pullback.

The next step is easy.  Take the three support levels on the chart that you’ve identified, make note, and then proceed to the final step.  That’s where you’ll figure out which strike price to use in your option trade.

Lastly, is the double check

Go to your selected option chains.  Yahoo Finance will be the easiest source to pull up stock option chains.  As soon as you’ve got your chains up, look at your support level strike prices.  Then look at each of their open interest amounts.

Open interest is the total amount of option contracts that are open for trading… either waiting to be bought or sold.  The reason for looking at this important information is because you’ll come to see it’s the strike most other professional traders are looking at.

And it’s usually the strike that carries the most probability of success.

Bottom line…

After following these steps, you should now be looking at the IBM July $195 strike puts.

And if everything plays out the way I think it will, this is the option that’ll give you the biggest bang for your buck!

Safe Trading,

Marcus Haber

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Category: Options Trading Strategy

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.