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IBM Puts Draw Crowds Following Rumors of a Profit Warning

Kevin Burke

One of the most significant catalysts driving options activity has typically been the rumor mill, a place where even the most darling of stocks venture from time to time.

And with earnings season approaching, the mill is churning up some IBM(IBM Quote) chatter yet again. In June, TheStreet.com reported heavy put-buying volume in IBM options after whispers of an earnings warning whisked through trading floors.

Yesterday, IBM was also one of the biggest losers on the Dow Jones Industrial Average as rumors resurfaced that the blue-chip computer giant might miss its financial targets. Throw in last week's bad news from EMC(EMC Quote) and that potentially spells trouble for Big Blue, considering a good portion of its revenue comes from storage. Shares of IBM traded down 1.7% to finish at $104.72 yesterday and continued to move lower today, finishing at $101.96.

Investors today sought the August put options as the premiums on the front-month options grew very expensive in the last two days. The implied volatility in IBM options has jumped from 47 to 55 over the course of the last week.

The July 95 put options traded about 4,300 contracts on open interest of 10,712, with the premium, or cost of the options, ranging from $1.40 ($140) to $1.65 ($165). "[Investors] are buying the July puts as a hedge against stock, or they're speculating the stock will move lower," said Paul Foster, strategist and editor at 1010WallStreet.com. With the company's earnings still a week away, Foster said to look for the volatility to move higher as the report date draws closer.

The August puts are more attractive, however, because there is more time for the share price to move below the strike price. The August 100 puts traded more than 16,000 contracts on open interest of 34,521. A majority of those puts were purchased at $4.60 ($460), up 90 cents from yesterday's close. Essentially, investors are looking for the stock to move below $97.50.

Elsewhere on the earnings front, volatility in Motorola(MOT Quote) options ticked upward ahead of its earnings announcement tomorrow. Volatility jumped to 67 from its week-ago level of 53. There was modest activity in the front-month options, but the August 15 puts seemed to please the crowd. Roughly 5,400 contracts traded on open interest of 3,276, with the premium hovering around $1.05 ($105) in the late afternoon.

Volatility in the overall market rose in true earnings season form, with the Chicago Board Options Exchange Volatility Index rising 8.7% to 26.53, a level not seen since June 15. Market volatility will move higher through the remainder of earnings season, but things will relax again, Foster said, who believes that the market is headed for a near-term summer rally. However, he did warn that September could present new challenges for the market.