International Business Machines Corp. (IBM) could be set to fall nearly 20% based on trading in the options market and an analysis of the stocks current trading patterns. Shares of the stock sit at a critical technical support level, while options traders are betting shares of the stock fall by January of next year.
The January 18, 2019 long straddle options strategy suggests that IBM stock could rise or fall by about 16.7% from the $145 strike price. It places shares of IBM in a trading range of $121 to $169. But the number of puts outweighs the calls with 3,600 put contracts of open interest, versus only 2,670 call contracts. Additionally, there are nearly 4,400 put contracts of open interest at that $135 strike, and with a cost per contracts of approximately $7.20, it suggests that the price of the stock would need to fall to below $128 just to break even.
After years of declining revenues, analysts are forecasting revenue to just barely grow by less than 1% per year in 2019 and 2020. But the earnings outlook isn't much better, with a growth rate of about 2.7% in 2019 and 3.7% in 2020. It makes the appearance of IBM's cheap one-year forward earnings multiple of 10.5 not all that cheap.
But should IBM's stock hold its uptrend, or report better than expected quarterly results in the middle of April, the stock would likely avoid the sharp decline. It could also spur option bets to be unwound and repositioned. It makes the upcoming quarterly results for IBM critical.
For now, IBM's stock appears to be nearing a breakdown, with options traders, technical charts and analyst estimates suggesting shares fall in the coming weeks and months.