At one point this morning IBM shares were up almost 2% on unconfirmed rumors that activist investor Carl Icahn was going to take a stake in the beleagured tech giant:
Shortly after the open, and in conjunction with the price spike, traders started buying up weekly near the money calls. As I put in QuickHits at 10:24am:
Total options volume today is running about 2x average, with calls outnumbering puts 3 to 1.
Shortly after 2pm Scott Wapner of CNBC broke in that he had confirmed that Icahn was in fact NOT buying IBM shares, and the stock subsequently sold off about 1%.
But I want to focus on the Nov 28th weekly 165 calls that started the day below 10 cents, traded as high as .55 and are now back down towards the lows at 13 cents:
So, you may ask, why are the calls getting killed when the stock is down only about 1% and still up on the day?
Short dated premium that happens to incorporate a Holiday will see its expiration period cut down by a day and a half. So buying weekly out of the money calls, when a stock has already spiked based on rumor, is not putting the odds in your favor unless you are literally looking to day trade. As always not only will you need to get direction right, but magnitude of the move and in this case very importantly timing of any expected move.
For a stock like IBM, down almost 14% on the year, and the worst performing stock in the Dow Jones Industrials, it shouldn’t take much to get the stock going if there was every a shred of good news. But as regular readers know, it is our view that you can dramatically increase your odds of success by not buying the most expensive (in vol terms) options on the boards that have one of the lowest probabilities of being in the money by expiration.
In contrast, with the stock down near 52 week lows:
and 30 day at the money IV also near 52 week lows:
It would make sense to express bullish views by looking out at least a month or two. The stock could be setting up as a decent “dog of the dow” candidate for those who like the strategy of buying the worst acting stock’s late in the year for a new year pop. The Jan 165/175 call spread is offered at about $2, making the breakeven in 2 months up 3% at $167, with a max gain of $8 at $175 or higher.