During the PM Pit Report an option mentoring students asked me to look at IBM into earnings. Initially I noticed that intermonth spreads were BEGGING the trader to take a delta neutral calendar or diagonal bet into earnings. The front month options were completely pumped up; the back month options had not gained very much value. There was certainly a good chance to take in some premium if the stock did nothing:
Notice spread between November and December.
However I then noticed something else, paper flow. This is a list of all orders that were over 150 contracts:
I decided to put a red dot next to every trade that I was 90% certain was a buy. As you traders can probably see it is almost all red dots. Paper went on a major buying spree in both puts and calls. At day's end the 140-145 strangle was trading over 5 dollars! That is an incredible premium. My personal feeling was that the stock was going to head south, settling around 135.
Overnight the stock is down about 4-5 dollars, I think it will give away another dollar or two during regular trading hours tomorrow. The stock had run up somewhat unjustly along with several other tech stocks in part because of the way GOOG crushed forecasts. When IBM has fallen off after earnings, there is usually some follow through. This is quickly followed up by some bottom feeders buying this widely held company. It’s almost like these guys can tell when mom and pop have told their stock broker to sell.
However, with this recent run up in which IBM is closed at the highest level it has been in over 2 years, I think we might see a little bit of an extension of tonight’s selling. My guess, IBM is down some more tomorrow, and the buyers of those November 140-145 strangles end up happy campers.
I will be making a presentation for TradeMonster on Wednesday the 20th. The subject will be a Trader's Guide to Volatility. Register here: TradeMonster.
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Data from livevol.
