Bullish Risk Reversal: IBM

Back in the hay days of tech bubble in late 90s, IBM traded as high as $134.94.  At the time, the valuation was far stretched at 40x earnings.  Today, IBM is trading around ~$130 and valuation has dropped to 11x forward earnings.  This is this case with many tech names and Cramer used the same logic last night in his show when he made a case that INTC could double in two years.  


I have two charts here to show.  One is very long-term monthly that shows that $135 level.  One is weekly that shows the rising support line which is forming a converging triangle.  The support line resides at $128 currently.  A break below that would be a major fundamental shift in trend on weekly chart and will not bode well for the stock.  

Given how low valuation is using forward PE multiple of only 11x, I am willing to make a bet that IBM is about to breakout above $135 to all time high.  Yesterday, there was massive bullish option activity as one trader bought over 24,000 July $150 calls for $0.25.  A few hours later, another 5,000 went through on the offer.  Then, there was a buyer of over 8,000 Oct $150 calls on the offer.  The open interest on all these strikes have soared this morning.  


Interestingly, IBM is trading down today but those July and Oct $150 calls are moving up slowly as implied volatility is moving up by 5%. 


Following bullish activity, cheap valuation and earnings coming up on 4/19, I am doing the following bullish risk reversal:


- Buy to open July $120 puts
- Sell to open July $125 puts, for net credit of $1.20


Use the proceeds from above bull put spread to partially finance:


- Buy to open July $140 calls for $1.55 debit


The maximum loss on the trade will occur if the stock falls off the cliff and goes below $120 by July expiration.  Like I said, the rising support line reside around $128, so if that were to happen, that would be a major fundamental shift in trend, and I doubt that is going to happen.  Maximum profit is unlimited to the upside.    


Good luck!