This Dow stock's about to sell off: Trader
IBM (NYSE: IBM) shares rallied on Monday along with the broader market (Dow Jones Global Indexes: .DJI), but one trader is bracing himself for some sharp moves lower.
"IBM has been stuck in a range with no conviction of buyers or sellers between $150 and $165," said Keene on the Market founder Andrew Keene on Monday's " Trading Nation ."
The technology company's shares have been bouncing in a $15 range since late October, when they saw a large gap down after disappointing earnings. "That makes me wonder what it will take to make the stock move," said Keene. "The next major catalyst for a move in the stock is earnings on April 20, and I wouldn't be surprised if IBM remained range bound until then."
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According to Keene, the options market is implying a 6 percent move in either direction after earnings. So in order to predict which direction, he looked at past results for clues. "When I look at how IBM has performed historically on earnings, I see that it has sold off six of the last eight quarters," said Keene. "So I'm using an options strategy to set up a play in IBM to the short side."
Specifically, Keene bought the IBM May 155, 150 and 145 put butterfly for a total of 55 cents. This is a bearish strategy where a trader will buy a put, sell two middle strike puts and then buy a lower strike put all in the same expiration. The trade is essentially targeting the strike of the two puts that he sold. So, in Keene's case, he is looking for IBM to go to $150 by May expiration.
"I like this trade because it's inexpensive to put on and it gives me a nice $9 range to make money," said Keene. "It's a great way to play IBM to the short side."
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