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Thursday, March 28, 2024

Top Trades for Tue, 30 Nov 2021 14:43 – IBM

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Top Trades for Tue, 30 Nov 2021 14:43 – IBM
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So, out of our Trade of the Year finalists, INTC, IBM and GOLD have all held up pretty well the last few days – that's a good sign.  

I think, as an overall trade (with great spread dynamics), INTC is the winner but it's really a two-year play due to their current investment cycle and profits will be off 1/3 this year so Q/Q comps will suck and traders are stupid so there's still a chance they trade lower – even if undeserved.  

IBM, I think, is going to show positive trends in 2022 so the catalyst is better earnings off a stupidly cheap floor.  IBM hasn't spend more than a few weeks below $110 since 2010 as that's about their 11x line.  Generally IBM is more like $120-140 and we can make a conservative spread there I can be very happy with.

In the MTP, we already have GOLD, SPWR and VIAC.  I'd go with T if not for the split (too complicated) so MO and WBA I guess are the other runner-ups.  WBA made $457M last year and MO made $4.5Bn (people gotta smoke) and let's not forget their earnings were depressed due to that JUUL disaster ($12.8Bn down the drain) they stepped into.  If pot is fully legalized, they will take over that industry too and they already own 45% of CRON, which they bought for $1.8Bn and they are down about 50% on that.  

I guess WBA is not as safe as MO but they only just started doing vaccinations and that will be a huge business in 2022 and was our original reason for liking them long-term, as is their 10x valuation.  

So I guess all 4 will be additions, just in varying degrees but IBM will end up being the Trade of the Year as it's the safest bet with the best chance of success.  

IBM – Another former Stock of the Year.  Also approaching 10x earnings at $115, which is just over $100Bn in market cap and IBM is good for about $9Bn/yr in earnings but they also have pricing power in an inflationary environment.  They are just finishing their 3-year digestion of Red Hat and now we should begin to see the benefits of this combination moving forward.  IBM has very little downside at this price and the upside could be well over $150 in two years so great risk/reward ratio on them.  My play would be:

  • Sell 5 IBM 2024 $100 puts for $12.50 ($6,250)
  • Buy 15 IBM 2024 $110 calls for $16 ($24,000) 
  • Sell 15 IBM 2024 $125 calls for $10 ($15,000) 

That's net $2,750 on the $22,500 spread so $19,750 (718%) upside potential if they gain $10 in two years is a pretty obtainable goal.  Downside is being forced to own 500 shares at net $105.50, which is almost 10% below the current price and, long-term, I certaintly don't mind owning IBM in our portfolio.

That was from Friday's close.  At the moment, the 2024 $100 puts are $11.45 so I'd sell the $105 puts for $15 instead ($7,500).  The $100 calls are now $22.33 and the $115 calls are $16 for net $6.33 ($9,495) so now we have a $22,500 spread for $1,995 so deeper in the money with $20,005 (1,002%) upside potential makes it a lovely trade of the year.  

That's for the MTP, for the LTP, same trade but with 20 short puts ($30,000) and 50 of the spreads ($31,650) and now we are spending net $1,650 on the $75,000 spread but we need to be damned sure we REALLY want to own 2,000 shares of IBM for $105.  Hmmmm, yes, I believe we do!  

Keep in mind this spread is CURRENTLY 100% in the money and our worst-case is owning IBM for a bit over $105 so it's simply a question of how much IBM are you willing to own to determine what size spread you can take.  As you know, I certainly don't look at this as a risk of $210,000 since it is incredibly unlikely IBM goes below $75, which is the lows of this century.  At $75, we're down about $60,000 and, of course, we could roll or whatever so the risk/reward is good and the likelihood of success is great – what else could you want from a Trade of the Year?