IBM Put Options Remain Active as Earnings Fears Linger

While the market plays the role of Doubting Thomas, option activity continues to signal otherwise leading up to IBM's(IBM) earnings announcement.

In the last three weeks, there has been a lot of noise in the option pits that IBM would issue a profit warning or miss its quarterly estimates. Because of the staggering number of companies lowering their guidance, option traders have taken up the belief that no one is immune to the slowdown. For example, last week, Emerson (EMR), the Cal Ripken of earnings growth, warned that it expects an 11% drop in second-quarter earnings. Prior to that announcement, Emerson had enjoyed 43 straight years of consistent earnings growth.

Volatility Index
Today	% Change
25.33	+0.08%
Source: ILX 3 p.m.

The implied volatility of IBM options has ticked upward in the last few weeks. With volatility surging higher, put option orders are flowing freely on most of the major exchanges. The August options have increased by 4% to 5% in the last week, according to Paul Foster, an options strategist and editor at 1010WallStreet.com.

"There are some pretty wide spreads in the front-month [July] options, which indicates that market makers are jittery," Foster said. The July 105 puts were the most active, trading more than 21,000 contracts on open interest of 29,307. The premium, or cost of the options, ranges from $2.70 ($270) to $2.90 ($290), up from $2.10 ($210) at yesterday's close. "The spread on those options is about 40 cents, a fairly wide spread."

As of Monday, IBM hasn't said anything to indicate that its own streak of consistency is in danger. In fact, the last two times rumors of an IBM misstep came about the stock responded positively. The market apparently refuses to buy the water-cooler gossip about Big Blue, which has been a rock-steady performer for the last eight years. Alas, even Tiger Woods misses a birdie putt every now and again.

Nasdaq Volatility Index
Today	% Change
55.00	+1.93%
Source: ILX 3 p.m.

The stock fell as low as $104.75 today following a research note from Merrill Lynch, in which the firm trimmed its revenue and profit estimates on IBM. Merrill said the move was prompted by the earnings announcement from Unisys (UIS) after the close Monday, in which the company said that international markets have deteriorated and weakening demand in Europe will likely hurt its third-quarter earnings.

Shares of IBM rebounded from the Merrill note this afternoon, closing up 71 cents to $108.53. But Foster said the brokerage outfit may be on to something. "When a house lowers revenue estimates, they have a pretty good grasp of what's going on," Foster argued. "It's definitely a negative sign."

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