International Business Machines Corporation (IBM) is one of those companies with a great global strategy that I consider a good long-term buy and I always look for short-term income plays. With the present pattern I see, I believe I have found a very short long-term income play.
Remember I said I like the company for a long-term investment also? This is one of the reasons I do. IBM has a fantastic long-term global expansion strategy. Here is one example how it is well positioned (and continues to expand) in China. When the Chinese economy starts to grow again, so will IBM's revenue base.
Sales Strategy in China
IBM is opening up two more offices in China as it continues to expand in the country. The two new branch offices will be in the cities of Yantai and Yinchuan, with 50 locations now. IBM has a well-thought-out plan on how it would open branches around the country. IBM establishes a geo expansion program, moving its operations into emerging high-growth regions. It continues to explore new areas that it considers untapped markets in second- and third-tier cities. This enables the company to move into areas and form a presence before other international players show up.
The two cities historically were agriculture-based, but with the growth in China, there are emerging services and manufacturing sectors driving new IT sector growth. These businesses are modernizing and turning to technology to be able to compete on an international level, as well as run more efficiently. This is when IBM engaged clients. Its services span sectors and include businesses like financial services, retail, textile, and telecommunications. As an example of what it does for these companies: IBM implemented a new IT system for Yantai Wanhua Polyurethanes Company to help manage the company's supply chain, human resources, and customer relationship processes. The client is expected to increase operational efficiencies by up to 77% in four years.
In the next five years, IT service in China is expected to double with spending exceeding $20 billion. IBM's growth will continue to expand as companies adopt next-generation IT systems, as well as IT services. Therefore, it looks like IBM will continue to be a strong global force. But since it is in a bearish pattern currently, I would consider a short-term income strategy while watching out for a turnaround in the stock.
Click to enlarge
That's long term, but in the short term, it is still in a bearish pattern. Therefore, I am going to capture some income following the trend.
The Options Play
- Since the stock has moved up a bit, it is now trading at 185.42 and I expect it to possibly continue to move up to 192.50 before it moves back down.
- Buy an October 2012 call with a strike of '185.00' (in the money) (priced at $8.10)
- Sell an October 2012 call with a strike of '190.00' (priced at $5.60)
- Net Debit to Start: $2.50
- Maximum Profit: $2.50
- Maximum Length of Trade: 4 months