International Business Machines Corp. (IBM) Buzz Brings Out Option Bulls

A glowing note from Morgan Stanley and a $2.6 billion purchase has International Business Machines Corp. (NYSE:IBM) atop the Dow

Feb 18, 2016 at 11:41 AM
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Big Blue's having a big day, as tech firm International Business Machines Corp. (NYSE:IBM) has jumped to a 5.3% lead to hit $132.77, making it by far the best performing Dow component so far today. Option traders are wasting little time. Call volume is on pace to notch an annual high by day's end, with the contracts crossing at seven times the average intraday clip. In fact, eight of the top 10 most popular strikes are calls, and it appears option traders are betting on extended gains through next week.

Specifically, the weekly 2/26 135-strike call is leading the way today, and buy-to-open activity has been confirmed here. By initiating the long bullish positions, the speculators are looking for IBM to top $135 before the contracts expire at next Friday's close.

On one hand, it's not unusual to see option traders implement this bullish strategy, since call buying has had the advantage over put buying at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) during the past two weeks on an absolute basis. Yet, that doesn't tell the whole story. IBM's 10-day put/call volume ratio of 0.92 is higher than almost four-fifths of readings from the past 12 months, meaning speculators have been buying puts at a faster-than-usual clip, historically speaking.

One reason for the blue chip's success today is an upgrade to "overweight" from "equal weight" at Morgan Stanley, which also boosted its price target to $140 from $135. The brokerage firm said it believes IBM deserves more credit for its transition to the cloud business, adding the stock "warrants a premium over other hardware companies." This optimism isn't exactly shared by Morgan Stanley's analyst peers. Specifically, 63% of brokerage firms say IBM is either a "hold," "sell," or "strong sell." Adding to this point, the stock's average 12-month price target of $132.40 is a discount to its current price. 

On top of the bullish analyst attention, IBM is also rising on news of its $2.6 billion purchase of Truven Health Analytics, a move meant to strengthen its Watson Health business segment. The company likely hopes it could also strengthen its positioning on the charts, where it's been underperforming for some time now. International Business Machines Corp. (NYSE:IBM) has been trending lower since its all-time high of $215.90 in early 2013. Narrowing the technical scope a bit, the shares have dropped 13.3% since their October high of $153.15. 
 

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