IBM: An IT "Option"

09/26/2003 12:00 am EST

Focus:

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

"One sector that has been seeing money flow really ramp up is computer hardware and services," says Bryan Perry, editor of The Tactical Trader. "Our latest surveys are calling for a very optimistic fourth quarter that will surely benefit the large hardware vendors, including IBM - the biggest gun in the sector." Here's his review and an options play.

"It has been a long time in coming, but a legitimate turn up in corporate IT spending is occurring. To benefit, we recommend an options trade in IBM (IBM  NYSE). Big Blue, as it is passionately known, is right smack in the middle of any upturn in IT spending and will certainly be one of the two or three go-to names for institutions as they climb aboard the IT recovery train. The highly respected Dan Niles of Lehman, a computer analyst who made a great call on Intel at $15, is now pounding the table on IBM, citing strong channel checks and business trends that favor IBM's business mix.

"Technically, the stock is ready to rumble. It has just broken out of a 10-month channel where $90 provided a Chinese wall of resistance, at least until last Wednesday when the stock cleared $90 on some real volume. This is technically huge in that the breakout has to be showing up on every big money radar screen around the world. Big-cap tech is also going to be more attractive to fund managers because they are a safer bet for fresh money in a market where all the high fliers have moved. The 10-day moving average sits right at $90, and so far the stock is hugging the 10-day very well with money flow really turning up over the past two weeks.


"We are recommending going long on the IBM January 85 Calls in lieu of the stock so as to meet our stated objective of 30%-50% gains for each trade. The stock should make a run to $100 over the next 90 days, filling the gap created back in April 2002. In doing so, the stock will enjoy a nine-point move that translates into a gain of about 10% for the shares. However, the IBM January 85 Calls are trading at $8.70 per contract, and a move up to $100 will place an intrinsic value on the calls of $15 per contract, which translates to a gain of more than 70%. We aren't asking anything monumental out of the common stock - just a 10% move higher over the next three months and we hit a home run on the calls. A technical breakout of this nature ought to get the stock to our price target."

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