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

| October 17, 2012 | 0 Comments

International Business Machines (IBM) reported quarterly earnings today.  Big Blue’s earnings were merely in-line with guidance.  It was a big disappointment for investors who are accustomed to them beating and raising guidance every quarter.

IBM currently trades for $200.37 per share.  The shares are up 15% from the 52-week low of $173.32.  After reporting 3rd quarter earnings, shares have fallen 5% from the 52-week high of $211.79.

Is this an opportunity to buy call options on IBM ahead of a new product cycle?  Or should you buy put options on IBM as their consulting business slows?

The bulls make a convincing argument…

IBM’s 3rd quarter wasn’t the typical beat guidance and raise future guidance.  But they still managed to meet expectations in a challenging business environment.

It’s more important to note why they didn’t exceed expectations.

IBM didn’t exceed expectations because a few software deals that were expected to close this quarter didn’t get done and hardware sales were weak.

But this should only be a temporary setback.

The software deals are expected to be completed in the 4th quarter.  And hardware sales were weak because IBM has new products coming out next quarter.  Customers simply held off on hardware purchases so they could get the latest and greatest when they become available next quarter.

If the revenue IBM missed out on this quarter is pushed into the 4th quarter, we should see Big Blue get back to beating and raising guidance.  And that will fuel the next leg of the rally.  

But the bears have a compelling case as well… 

Forget about the new product cycle, this is all about execution.  And IBM didn’t execute last quarter.

Put simply, it’s not acceptable for a stock that’s hitting fresh 52-week highs to not execute.

The most glaring example of their failure is the Global Business Services segment.  This is their consulting business that contributes 18% of the company’s revenue.

GBS has struggled the last three quarters.  And that doesn’t have anything to do with the new hardware product cycle.

What’s more, management indicated September was their weakest month last quarter.

If the weakness their business saw in September lingers on into October, they’ll fail to beat and raise guidance again in the 4th quarter.  And that’s a dangerous combination for a company that investors expect to beat and raise guidance every quarter.

If you think the bulls are right, take a look at buying the IBM January 2013 $205 calls for around $3.80.

If you think the bears are right, take a look at buying the IBM January 2013 $190 puts for around $3.20.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.