Options: Risk Reversals in Dell and IBM

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Right out of the gate today, we saw investors selling off the upside of computer-makers Dell(DELL Quote) and IBM(IBM Quote) to decrease the cost of downside protection.

More than 10,500 Dell Jan. 2010 15 calls traded in the first half hour of the day with the stock trading at $12.69. These calls, which are currently trading down two cents, are home to current open interest of more than 13,000. Looking at the Jan. 2010 10 puts, more than 10,500 also traded during the first half hour of the trading day.

A customer bought the Jan. 2010 10-15 risk reversal, buying the out-of-the-money Jan. 2010 10 puts and simultaneously selling the out-of-the-money Jan. 2010 15 calls 10,000 times this morning. These puts are currently trading down two cents and are home to current open interest of 21,000.

We also saw significant risk reversal action in IBM, as the Jan. 2010 85 puts and the Jan. 2010 120 calls changed hands 5,000 times each. The out-of-the-money Jan. 2010 85 puts, which are home to current open interest of 4,750, are currently unchanged on the day, while the out-of-the-money Jan. 2010 120 calls are currently trading down five cents and are home to current open interest of 2,800.

The volume weight average price (VWAP) of the Dell Jan. 2010 15 calls is 71 cents while the VWAP of the Jan. 2010 10 puts is 90 cents -- that equates to a net price of 19 cents for the spread. VWAP of the IBM Jan. 2010 85 puts is $3.05, while VWAP of the Jan. 2010 120 calls is $4.25 -- net credit of the IBM Jan. 2010 85-120 risk reversal is $1.20.

While Dell and IBM did not announce significant news, IBM's new technology agreements sent the stock up 11 cents to $107.11 in midday trading before dropping to $106.78. Dell's stock has dropped 12 cents to $12.64 so far today. DELL reached a 52-week low of $7.99 on Feb. 23, meaning the stock has rallied nearly 60% in less than four months. IBM shares dipped to a 52-week low of $71.74 on Nov. 20. The stock is now up about 47% since then.

Put-buying and call-selling like this is usually more of a hedge than a super bearish bet. The investor could very well be long shares and at least one investor is just giving up potential upside as a way of purchasing some downside protection.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.