Good morning!
Hope everyone had a good weekend.
Should be kind of a slow semi-holiday today.
IBM/Batman – Krishna says the hybrid cloud opportunity is a $1Tn market:
"Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating … Now is the right time to create two market-leading companies focused on what they do best."
The company will spin off the Managed Infrastructure Services unit of its Global Technology Services operation into a new public company. The tax-free deal is expected to be completed by the end of next year.
The company sees Q3 adjusted EPS of $2.58 vs. consensus of $2.58, and revenue of $17.6B vs. $17.56 consensus.
So they've raised guidance ahead of the spin-off and they're not doing the spin-off to head lower, right? Last two Qs were $1.84 and $2.18 so these guys are pretty virus-proof so $2.58 and last year's Q4 was $4.71, which would put us at $11.31 though I doubt Q4 will be as strong as last year. So $12.30 is not out of the question but the spin-off and transition could be a bit disruptive so I wouldn't go too crazy but I'm certainly comfortable with IBM at $125 for the long-haul as the same good value it was when we picked it at $110 in Nov 2018 as our Stock of the Year for 2019.
The Stock of the Year doesn't have to go up (we hit $150 in Jan 2020) but it does have to be one we are certain will make 300% with an options trade and just knowing we got a bargain was enough to be sure with IBM.
At the moment, I wouldn't make IBM the stock of the year because it COULD fall back to $100 if the market tanks. THEN I would love it but $127.79 is simply a good price at the moment.
Of course you can own IBM for $100 by selling the 2023 $100 puts for $11.50 so, if we consider that free money, then our trade can be:
- Sell 5 IBM 2023 $100 puts for $11.50 ($5,750)
- Buy 10 IBM 2023 $110 calls for $26 ($26,000)
- Sell 10 IBM 2023 $125 calls for $19 ($19,000)
That's net $1,250 on a $15,000 spread so there's $13,750 (1,100%) upside potential if IBM stays over $125 and, if it doesn't, we should be thrilled to invest more money in rolling down the short calls to the $100s for $5 ($5,000) or less or the $90s for $10 or less ($10,000) and then we'd be in a $35,000 spread for net $11,250 with $23,750 upside potential if we make it back to $125 but our break-even would be $101.25 – that's a risk I could certainly live with!
That's what makes a great trade, the downside to this one is owning 500 shares of IBM for net $102.50. I'd LOVE to own 500 shares of IBM at $102.50 so there's nothing about this trade that worries me. I'll almost be disappointed if it goes straight up and all we make is 1,100%. Meanwhile, it's a nice, margin-efficient trade as the ordinary margin is just $4,028 as it's more than 20% out of the money on the short put side.
We don't have IBM in the LTP so let's add this one but with 10 short puts and 20 long spreads.
Be aware that they are spinning off so these options will get messy down the road but, like SPWR, I'm not afraid of a good decision affecting our position.
