Call Options Or Put Options On International Business Machines (IBM)?

| January 22, 2014 | 0 Comments

NTAP OptionsInternational Business Machines (IBM), the world’s largest computer-services provider, just released earnings yesterday.  Investors are clearly not happy with the results as the stock is down 3% as of this writing.

IBM shares are trading at $182.89.  The stock’s up just 5% from the 52-week low of $172.57 and is 15% below the 52-week high of $213.82.

Is this an opportunity to buy call options on IBM due an overreaction by sellers after the company’s revenues missed expectations?  Or should you buy put options on IBM because of the rapidly declining demand for servers and other hardware?

The bulls make a convincing argument…

While IBM’s quarter was disappointing, particularly from a revenue perspective, there’s a light at the end of the tunnel.

IBM management is wisely shifting focus away from hardware and focusing on higher margin services.  The company has been aggressive at ramping up their cloud-computing offerings as well as creating a new division focusing on supercomputing technology.

The company is also divesting their low-margin businesses and cutting jobs in an effort to improve the bottom line.  In fact, IBM is negotiating the sale of its low-end sever business to Lenovo, who also bought the Thinkpad brand.

But the bears have a compelling case as well… 

Whether or not IBM is expanding into new businesses, a big portion of the company’s revenues come from servers.  Without a doubt, the server business is in trouble.

IBM has had seven straight quarterly declines in revenues due mostly to the significantly lower demand for servers.  Companies are moving to cloud-computing for storage, and while IBM is moving in that direction, there are already major competitors in the space.

In a signal that things are far from well at the company, IBM executives are foregoing their annual bonus.  When the bigwigs decide to take a pay cut, it’s never an encouraging sign.

So is the big selloff in IBM shares a reason to buy, or is the company in trouble due to the plunge in server demand?

If you think the bulls are right, take a look at buying the IBM March $190 calls for around $1.30.

If you think the bears are right, take a look at buying the IBM March $175 puts for around $2.50.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.