Buffett Buoys IBM, Option Traders Unconvinced

Warren Buffett announced his company, Berkshire Hathaway Inc. (NYSE:BRK.A), has upped its stake in International Business Machines Corp. (NYSE:IBM)

Sep 8, 2015 at 1:59 PM
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Warren Buffett is at it again. This time, the Oracle of Omaha revealed his company, Berkshire Hathaway Inc. (NYSE:BRK.A), upped its stake in International Business Machines Corp. (NYSE:IBM) in the third quarter. Recently, news that BRK.A bought a sizeable stake in Phillips 66 (NYSE:PSX) sent that stock soaring, and today, shares of IBM are up 1.6% at $146.03.

The news has done little to impress option traders, though, who appear to be buying to open IBM's September 144 put for a volume-weighted average price (VWAP) of $1.63. In other words, these put buyers expect IBM to breach the breakeven mark of $142.37 (strike less VWAP) by next Friday's close, when front-month options expire.

More broadly speaking, skeptical traders have been setting up camp in IBM's options pits in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 1.08 ranks in the 92nd annual percentile. Simply stated, puts have been bought to open over calls at a faster clip just 8% of the time within the past year.

This put-skewed bias is witnessed in IBM's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR), as well, which is currently docked at a top-heavy 2.00. What this means is that near-the-money put open interest doubles call open interest in the September series of options.

Drilling down on specific strikes, a lofty accumulation of put open interest is found at the September 145 strike, and according to data from the ISE, CBOE, and PHLX, the majority of these options have been bought to open in recent months. By initiating these long positions, the put buyers have been betting on International Business Machines Corp. (NYSE:IBM) to settle south of the strike at front-month options expiration. Good news for the put buyers -- the most they stand to lose is the initial premium paid.

 

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