International Business Machines Corp. (IBM) Bears Brace for Another Earnings Drop

Traders seem to be betting on a repeat of International Business Machines Corp.'s (IBM) dismal post-earnings price action

Jan 19, 2017 at 11:14 AM
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Tech stock and Dow component International Business Machines Corp. (NYSE:IBM) is 0.3% lower at $166.24 today, as the company prepares to report fourth-quarter earnings after tonight's close -- and it appears traders may be bracing for a repeat of history. The shares have moved to the downside in the session after earnings for at least the past eight quarters, averaging a single-day loss of 3.6%. While IBM options are currently pricing in a slightly wider 4.6% swing in either direction for Friday's trading, sentiment toward the stock is broadly bearish.

Beginning with the brokerage bunch, nearly two-thirds of the analysts following IBM currently recommend holding or selling the stock. The average 12-month price target of $158.90 also sits at a discount to current trading levels. Should IBM turn in a positive earnings surprise, the outperforming equity may be overdue for some upbeat analyst attention, which could prove a boon to the shares.

Short interest on IBM is also elevated. Though short interest plunged 7.9% in the most recent reporting period to 23.1 million shares -- a mild 2.7% of the equity's available float -- it would still take more than eight sessions to cover all these remaining bearish positions, at IBM's typical pace of trading. A continued round of post-earnings short covering could translate into fresh tailwinds for the shares.

Turning to the options pits, speculators have shown an unusual affinity for IBM puts in recent months. The stock's 50-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 1.10 -- higher than 88% of comparable readings from the past year. What's more, IBM's Schaeffer's put/call open interest ratio (SOIR) of 1.67 ranks just 2 percentage points from a 12-month high.

IBM's total put open interest is also docked in the 99th percentile of its annual range, with 216,737 contracts outstanding. It appears bearish traders have targeted the January 2017 160- and 165-strike puts, which are home to IBM's top open interest positions and account for nearly 44,000 contracts collectively. According the major options exchanges, a considerable number of these positions have been bought to open, indicating put players are betting on IBM slipping below the respective strikes before tomorrow's close, when the front-month series expires.

All this downbeat pre-earnings sentiment is somewhat understandable, given IBM's post-earnings history. Nevertheless, the blue-chip stock has been a strong technical performer over the past year. The shares have been stair-stepping higher since last February, adding more than 36% on a year-over-year basis, and are now consolidating near the 30-day moving average after hitting an annual high of $169.95 in mid-December. Should International Business Machines Corp. (NYSE:IBM) turn in a well-received earnings report, the prevailing pessimism toward the stock may be setting up an attractive opportunity for contrarian bulls.

IBM Daily Chart January 19

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