Would You Buy IBM Stock At A 35% Discount?

Pocket a healthy income stream from IBM today that’s yours to keep, while setting a price far below the current market where you’d be happy to own the shares. 

International Business Machines (IBM) has been a study in contrasts, trading near $301.77 a share after a strong quarter that still left it trailing the index’s run over the past year. While investors debate whether the tech giant’s turnaround has truly taken hold, an options trade offers a way to get paid a strong income stream for simply stating the price at which you’d be willing to buy in.

11% annualized yield at a 30% margin of safety, by selling put options

• Sell a put option on IBM expiring 6/17/2027, with a strike price of $210.
• Collect roughly $1,488 in premium per contract (each contract covers 100 shares).
• That works out to about 6.8% annualized on the $21,000 of cash you set aside to secure the trade.
• Park that cash in a money market or savings account earning roughly 4.0%, and your total yield climbs to about 10.8%.
• And if IBM falls below $210, you buy it at $210, an effective entry near $195.13 a share after the premium, about a 35% discount to today’s $301.77.

Image by Curtis Parfitt-Ford from Pixabay

Two Ways This Plays Out: Income Generation or Discounted Entry

• If IBM stays above $210 through 6/17/2027, the put expires worthless, and you simply keep the full $1,488 premium. That is about 7.1% on the $21,000 you set aside over 378 days, cash that might otherwise earn you 4.0% or so. You never buy the stock and keep the income, free to do it again.
• If IBM closes below $210, you are obligated to buy 100 shares at $210. While the $1,488 premium you collected lowers your effective breakeven cost to $195.13 – a roughly 35% discount to today’s price – you take on the risk of holding the stock. If IBM’s share price drops significantly below your breakeven, you will incur a capital loss, just as you would if you owned the stock outright.

So what happens if IBM really does close below $210, and you are the one buying? Then everything rests on a single question.

What You Would Actually Be Buying

This trade hinges on a question: Would you be comfortable owning IBM at a significant discount to today’s price? The bull case is that the company’s strategic shift is finally bearing fruit. The first quarter saw revenue grow 6%, fueling a 13% jump in free cash flow. This wasn’t a fluke driven by a division. Software revenue grew 8% and Infrastructure was up 12%, powered by what management called a “record Z quarter” for its mainframe business. The company is so encouraged by the momentum in its software-led model that it now expects that segment to grow “10-plus percent this year.” For believers, this is evidence of a revitalized giant finding its footing in hybrid cloud and AI. How does this strategy compare to other enterprise cloud peers? See Is Oracle Stock A Smart Buy At $230?

But the market’s skepticism isn’t without merit, and that’s the risk you’d be underwriting. After posting such a strong start to the year, management chose to be “prudent to maintain our guidance,” a decision that prompted analysts to ask if the company was “seeing evidence of something slowing.” The biggest drag on the story is the massive Consulting segment, which grew just 1%. While software is humming, some investors noted the 8% growth was a “downtick” from the prior quarter. The fear is that the current strength is too concentrated in a hot mainframe cycle and that the broader business isn’t yet firing on all cylinders. If that proves true, the stock could easily drift lower.

Ultimately, this trade pays you to see how that debate plays out, with a substantial buffer before you’re on the hook to buy shares. You are essentially taking the view that if the stock does fall, it will be an opportunity to own a cash-gushing technology leader at an even better price. The single most important signpost to watch is whether the company’s turnaround can broaden. Keep an eye on the Consulting business, where management expects an acceleration to “low to mid-single digits for the year.” If that happens, it signals the growth engine is becoming more balanced; if it stalls, the skeptics may have a point.

Wondering whether another stock offers a better yield, or what this same trade would pay on a name you already like? You can screen the latest cash-secured put yields across the market for yourself.

Complementing An Active Trade Like This

A cash-secured put is an efficient way to engineer income and a lower entry on a stock you have done the work on. It is also a single-name bet that can leave you holding a falling stock, so it is one tool, not a whole plan. For investors who want to pair active trades with a hands-off, diversified engine, the Trefis High Quality (HQ) Portfolio holds 30 quality names, sized and re-balanced with discipline, and has a track record of outpacing the S&P 500, S&P Mid-cap, and Russell 2000.