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Option Traders Split Over IBM's Post-Earnings Price Swing

Calls and puts are flying off the shelves on IBM today

by 1/23/2013 1:41 PM
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Option players are targeting International Business Machines Corp. (NYSE:IBM - 206.30) in today's session, with both calls and puts crossing the tape at an accelerated clip. Around 75,000 calls have changed hands so far, representing more than six times the average intraday volume. Meanwhile, roughly 51,000 puts have crossed the tape, about four times above the expected intraday pace.

With the stock up around 5% today, short-term option traders are betting on IBM to either continue with -- or retreat from -- this positive price action through the end of the week. Bullish speculators are scooping up the equity's 1/25 210-strike call. A healthy portion of the roughly 6,500 contracts traded have crossed at the ask price, and volume is outstripping open interest. Elsewhere, bearish traders are honing in on IBM's 1/25 205-strike put, which has seen almost 3,800 contracts change hands. The majority of these have gone off at the ask price, and only 17 contracts currently make up open interest here. Summing it all up, it appears new positions are being bought to open at each strike.

By purchasing the out-of-the-money calls to open for a volume-weighted price (VWAP) of $0.39, traders need IBM to rise 2% to topple breakeven at $210.39 (strike price plus VWAP) by the close on Friday, when these near-term options expire. Conversely, breakeven for the near-the-money puts is $204.25 (strike less VWAP of $0.75), meaning the stock must tumble roughly 1% for these options to be profitable at expiration. The most either group of speculators has risked is the initial premium paid.

The stock is soaring in today's session after last night's stronger-than-anticipated earnings report prompted a round of bullish brokerage notes this morning. This post-earnings pop brings IBM's year-to-date advance to roughly 8%. Additionally, the stock has nearly filled in its mid-October bearish gap, suggesting a new layer of support could be emerging.

At last check, IBM was hovering near $206.30.


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