International Business Machines Corp. (NYSE: IBM) announced today that it would buy Canadian business-software maker Cognos Inc. (NASDAQ: COGN) for $4.9 billion. The deal would enable IBM to deliver new business insights to a wider set of people across an organization, the company said in a statement. Usually when a company makes an acquisition like this one, its stock drops by at least a little bit. IBM is higher today on this news, which signals investors think this deal was a bargain and good for IBM. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on IBM.After hitting a one-year high of $121.46 in October, the stock has fallen off a bit over the past month. IBM opened this morning at $101.89. So far today the stock has hit a low of $100.70 and a high of $102.66. As of 10:50, IBM is trading at $102.51, up $2.26 (2.2%). The chart for IBM looks neutral and improving slightly, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $90 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 9.9% return in just 6 weeks as long as IBM is above $90 at December expiration. IBM would have to fall by more than 12% before we would start to lose money.
IBM hasn't been below $90 at all in the past year and has shown support around $100 recently. This trade could be risky if the company's recent slide continues, but even if that happens, this position could be protected by bargain hunters who may see value at this price. Plus IBM is not due to report earnings again until January, which is well after this position expires.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in IBM or COGN.
Before the bell: Stocks ready to climb on hopes of continued low rates
Why do we have a weak dollar?
Holiday hiring slow for retailers
