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Bearish Bets Grow as IBM Corp. Bounces Back

Put trading spikes on computer giant as it takes out technical resistance

by Jocelynn Drake (jdrake@sir-inc.com) 12/17/2008 2:03 PM

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The shares of IBM (IBM: sentiment, chart, options) have held up fairly well in 2008, shedding only 20% of their value, while the Dow Jones Industrial Average (DJIA) has retreated 33%, and the tech-laden Nasdaq Composite (COMP) has stumbled more than 40% lower. What's more, the security is beginning to show signs of breaking out of the doldrums that have trapped many equities. And yet, this growing strength has been met with an increase in skepticism from investors. From a contrarian perspective, this combination of pessimism on a rebounding stock could make for an interesting bullish opportunity.

International Business Machines is one of the world's top providers of computer products and services, according to Hoover's. The firm manufactures mainframes and servers, storage systems, and peripherals. Though perhaps still best known for its hardware, IBM's growing services business now accounts for more than half of its sales. Its IT services arm is the largest in the world, and the company is also one of the largest providers of both software and semiconductors.

Technically speaking, the security has recently broken above resistance at the 85 level, which had capped IBM from November 10 through December 15. This region could now serve as a layer of support for the shares as they begin the next leg of their uptrend from their November low of $69.50. In fact, since reaching a low in November, the stock has created a series of higher highs and higher lows.

What's more, the security is poised to finish the week above its downtrending 10-week moving average -- a trendline the stock has not closed a week above since mid-August.

WEEKLY CHART OF IBM SINCE JUNE 2008 WITH 10-WEEK MOVING AVERAGE

Despite the stock's recent show of technical strength, options players have exhibited a preference for puts over calls on the International Securities Exchange (ISE). During the past 10 trading sessions, an average of 4.2 puts has been purchased to open for every 1 call purchased to open. This ratio of puts to calls is higher than 95% of all those taken during the past year, pointing to a growing pessimism among options players.

Meanwhile, the Schaeffer's put/call open interest ratio (SOIR) for IBM stands at 0.96, as put open interest nearly equals call open interest among near-term options. This reading is higher than only 31% of all those taken during the past year, indicating a bullish leaning on a historical basis.

However, the SOIR for IBM is on the rise, climbing from 0.93 on December 15 to its current perch. During this time frame, call open interest among options set to expire in less than 3 months increased by 1.8%, while put open interest swelled by 4.4%. This growing penchant for puts over calls indicates that traders are skeptical of the stock's recent gains and are looking for a pullback.

Short sellers are also anticipating a drop in the shares. During the past month, the number of IBM shares sold short increased by 21% to 13.4 million. Yet, despite this increase in short-selling activity, the stock has managed to make gains, emphasizing the underlying strength in the shares.

One concern regarding the security comes from Wall Street. IBM has earned 11 "buy" ratings and 3 "holds," according to Zacks. Such a configuration leaves the shares vulnerable to potential downgrades, should the equity fail to live up to expectations.

Overall, traders should keep a close watch on the stock's 85 level and 10-week moving average. A solid close above this pair could indicate that the security's uptrend is here to stay for at least the near term.

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Bearish Bets Grow as IBM Corp. Bounces Back

Put trading spikes on computer giant as it takes out technical resistance

by Jocelynn Drake (jdrake@sir-inc.com) 12/17/2008 2:03 PM

IBM

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options