Posts Tagged ‘IBM’
Buy or Sell: IBM Reports Earnings Monday
Written by Jared Levy, Editor, Options Strategy Weekly
IBM (IBM:NYSE) is one of the few tech companies that have been able to reinvent themselves. With the fast-paced evolution of technology, many of its early peers are long gone.
IBM has a history of strong earnings growth, and the stock has been on a tear over the past year — gaining almost 28%. The question now is whether its earnings will support its lofty stock price.
My earnings thesis uses several points of analysis so that I can fine-tune my estimates. There is no absolute when it comes to how the markets will respond to an earnings report, but with a checklist, logic and a little experience, you can substantially stack the odds in your favor.
Graphing Growth
Comparing data visually is extremely helpful when you need to put things in perspective. The first data I analyze is price-to-earnings and revenue growth. The chart below tells us several things:
- IBM is at a relative price-to-earnings (P/E) multiple high point over the past two years (solid yellow line) — this brings risk of a pullback.
- IBM tends to generate its most revenue in the last quarter of the year, so the big expectations are going to come at the next report; this quarter may not be as heavily weighted.
Chart Courtesy of Bloomberg
View larger chart
The average analyst is looking for IBM to earn $3.22 this quarter, which should knock down the P/E multiple to 13.37 with IBM at $186.80. Out of those analysts, 16 of them rate IBM as a buy and 14 have it as a hold, with zero sell ratings.
The problem I see here is that the target price is about Read more
How to Make Money in This Mess
| How to Make Money in This Mess |  |
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| Written by Jared Levy, Editor, Option Strategies Weekly | |||||
| Tuesday, 09 August 2011 09:10 | |||||
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Savvy investors can use volatility to make lots money in a bear market. There is a secret about the Volatility Index (VIX) that can potentially make you thousands of dollars. What Does the VIX Really Symbolize?Think of the VIX as a “fear” indicator. Most investors — and even some experts — don’t know how to actually use it. You may hear things like “if the VIX is high, it’s time to buy” or that when the VIX is high, people are scared. But the real question is, how does it affect my financial investments? Let’s first take a look at how the Volatility Index tends to react with the markets. Below you see a chart of the S&P 500 (SPY in green) compared to the VIX (in black). The two generally have an inverse relationship. When the market is rallying, the VIX is dropping and vice versa. To put it simply, the Volatility Index has a direct relationship with options prices. As people buy options and the VIX goes higher, options get more expensive. When people sell options and the VIX drops, options get cheaper. So here’s the thing… What if you bought a call option, had the stock rise, and either lost money or didn’t make as much as you thought you would? Did you ever think that a falling VIX was eating away at your profits? If so, then you have discovered part of the secret. If you’re loving this article, sign up for Smart Investing Daily to receive all of Jared Levy and Sara Nunnally’s investment commentary.
Here Is How It WorksWhile you might think that Wall Street is manipulating Read more |
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Investors are scrambling to figure out which way is up and what the market’s next move will be. The one thing that we can bet on in the near term is more volatility.
Bear Market: The Strategy to Avoid the Pain
Friday, 05 August 2011
I often say the stock market is always looking three to six months ahead with tunnel vision.
But from time to time, the market stops to take a look around. When the blinders were removed last week, the market realized it was no longer in Kansas. A swirling tornado of debt, economic and consumer weakness, and near frozen credit conditions across Europe brought a rude awakening to what has been a careless stroll for equities.
Some traders are calling for the markets to retest their 2009 lows. I have my own theories on that, which I will share with you shortly.
The next question is, will the tornado unwind, or will this swirling mess spin faster? You would be surprised at what some of my friends on Wall Street are doing.
When Margin Calls…
In just two weeks’ time, the Dow Jones has lost over 1,200 points. More importantly all three major indexes not only have gone negative on the year, but have all broken below their 200-day moving averages. This is an extremely bearish sign and usually means a bull market is coming to end.
In seven of the past nine days, selling seemed to pick up just before the markets closed. At the same time, volume increased. In my experience in the pit, when investors are selling into the close on a down day, we are entering a bearish market.
This selling snowballs when traders who bought on margin have to sell their shares to cover margin costs. Typically a trader will wait until the very last minute to execute this trade: The calls come at 3:30 p.m. ET.
Look at the 15-minute chart below. I placed the volume Read more
Litmus Test for New ETFs — Should You Jump Into this Smart Phone Fund?
I was out to dinner at a swanky restaurant here in Dallas where you would think etiquette would prevent the use of electronic devices at the table. I was blown away when I looked around the room and saw that about 40% of the patrons were using their smart phones to exchange pictures, surf the web, check out the reviews of some of the wines on the menu, etc. These aren’t kids without manners; the smart phone is transcending generations as the bulk of the diners using the devices were over 50!
Smart phones at dinner
For years now, I have been preaching about the huge upside growth potential in the smart phone sector and have outlined several stocks such as Google (GOOG:NASDAQ), Apple (AAPL:NASDAQ), Research in Motion (RIMM:NASDAQ) and others to invest in. I still believe that the smart phone will become the proverbial “wallet” you carry around with you, keeping you in touch wherever you are and perhaps one day even replacing your identification and credit cards.
But is investing in a company like Apple, Google, Research Read more
Expiration Friday – Are you Prepared?
After Steve Claussen and I wrapped up our weekly webinar on expiration risks , I thought it might be helpful to highlight what we discussed and offer a couple of other important pointers to remember for this monthly (and now weekly and quarterly) event. Expiration for professional traders is a time to reduce risk and unwind any trades that could be “unknowns” going into expiration Friday.
The third Friday of each month is also a time to look ahead to what positions will be kept open through Monday morning. Finally, it is the time to make decisions on whether to “roll” open trades. This basically means buying or selling a spread to extend an open position to the next month (or beyond).
“Unknowns”
When I use the word “unknowns,” I am mainly referring to options positions, both long and short, that are at-or near-the-money. The term “Pin-Risk” directly applies to options expiration. Pin-risk is the phenomenon where the underlying stock “pins” right at a strike. For professionals, there are advanced tactics like converting or reversing to neutralize pin-risk.
For the average retail trader, generally the real risk is associated with shorted options, which give the seller NO control over whether their options will be exercised or not. The stock doesn’t even have to “pin” a strike to create complications at expiration.
This risk may either be naked short options or (perhaps even more dangerous) short options that are part of a spread. Traders may find themselves in situations where they do not have the funds available to cover, nor do they have the intention of ultimately being long or short the stock.
Expiration Risk Example
If you were short 20 (uncovered) IBM 130 calls and IBM stock closed at $130 on Friday afternoon, you have no way of knowing if these calls will be assigned or not. The Options Clearing Corporation (OCC) stipulates that any option that is one cent in-the-money or greater will be automatically exercised, unless the buyer specifically specifies he does not want them to be exercised. So even if IBM were to close at $130.05, there is still some chance that some or all of your short calls will NOT be assigned.
But what if IBM closes at $129.90? Anyone who sold the 130-strike calls is probably pretty happy. Let’s say you decide to let your calls expire instead of buying them back for three cents each (the offer price at 4:00 pm ET).
At 4:05 pm, you run out for a round of golf since the market is closed and it’s the weekend. At 4:20 ET, Intel issues a forecast for higher-than-expected PC sales. This report sends IBM shares higher in sympathy and the shares are now trading at $132.00 in post-market trading.
While you’re out golfing, the buyer of those calls, which are now in-the-money by $2.00, exercises all of them. Your broker notifies you of this on Saturday and come Monday, you are short 2,000 shares of IBM at $130. IBM opens Monday at $135 on the good news from Intel … this is not good news for the short call holders!
What would have cost you three cents a contract…
Why Marry a Put?
By Jared A Levy
Options jargon can easily drive people nuts, whether they are novice or seasoned. Some names for certain strategies are certainly more intuitive than others. I’d like to think that the “Married Put” term is in the quasi-intuitive category. Regardless, I am going to spend the next dozen or so paragraphs addressing not only the definition, reasoning, and risk of the strategy, but also to address some of the questions we received during Tuesday’s Two Traders, One Strategy webinar. I encourage all of you to join us for this presentation every Tuesday at 4:30 p.m. Eastern Time. You can register here; it’s free.
Married Put Defined
The married put is just that; it’s a long put married to (combined with) long stock. It is a strategy that can be used to set a “stop limit” or to hedge your long stock position to the downside. For every 100 shares of stock a trader is long in her account, she would purchase one put to create the married put strategy. Off the bat, this may seem a bit strange; buying stock (a typically bullish act) but simultaneously buying a put (a bearish act)? The popular covered call strategy has a similar dichotomy (long stock, short call), but let me explain why the married put is quite different.
If you examine the risk graph above, you’ll notice that it looks completely different from the covered call. The married put strategy still offers unlimited upside potential, indicated by the 45-degree angle at the right half of the graph, above the breakeven point. On the left half of the chart, below the breakeven point, you will notice the line is flat, meaning that downside is limited. So in theory, this is a limited downside strategy, with unlimited upside; that sounds great, doesn’t it?