Right out of the gate yesterday, we saw investors selling off the upside of computer makers Dell (NASDAQ: DELL) and IBM (NYSE: IBM) to decrease the cost of downside protection.
More than 10,500 Dell (DELL) Jan. 2010 15 calls traded in the first half hour of the day with the stock trading at $12.69. These calls were home to 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 time yesterday morning.
We also saw significant risk reversal action in IBM (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 were home to open interest of 4,750, were unchanged on the day, while the out-of-the-money Jan. 2010 120 calls were trading down five cents and were home to open interest of 2,800.
The volume weight average price (VWAP) of the DELL Jan. 2010 15 calls was 71 cents, while the VWAP of the Jan. 2010 10 puts was 90 cents -that equates to a net price of 19 cents for the spread. VWAP of the IBM Jan. 2010 85 puts was $3.05, while VWAP of the Jan. 2010 120 calls was $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 and DELL stock dropped 10 cents to $12.66 at one point yesterday. 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.
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