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IBM Options Priced Not to Move

|Includes: AMED, International Business Machines Corporation (IBM), MDVN, TEVA

Stocks have recouped most of Friday’s losses and the resumption of the gentle ride higher has allowed the VIX to drift below 18 which is the lowest levels in 18 months.  But don’t mistake this for options being cheap, the implied volatility on the S&P 500 options still stands some 6 percentage points above the 20-day historical volatility of the Index.  

The recent focus on energy and materials has shifted today to health and drug names in anticipation of the Mass. Senate seat vote and financials in the wake of CitiGroup earnings. 

Active options include Teva Pharmaceutical (NYSE:TEVA) which saw the June $60 and Sep. $62.50 calls trade 4,400 times each in a spread in which it looks like purchase of June and sale of Sep for 20c debit.   

Medivation (NASDAQ:MDVN) shares are up 25c to $36.70 and there is active put selling as the February $35s and February $30s traded a block of 1,500 and1,000 contracts at the $1.85 and 45c bid respectively.  This could be liquidating after shares of the biopharma company took a hit on Friday and those strikes traded heavy volume of 16,480 and 10,050 contracts each on Friday with most translating into new open interest.  

Amedisys (NASDAQ:AMED) shares are up $1.75 to $55 and active buying in the February $55 calls as 1,700 contracts have traded with 87% at the asking price with exchange data indicating that 95% of the volume is opening transaction. 

Mylan Labs saw a spike in call volume on Friday and some follow through buying this morning in the Feb. $20 calls. 
The feature after the close will be IBM earnings and the options look relatively cheap.  The at-the-money strikes barely carry a 20% IV which is just above the 52-week trough of 18% set during the Christmas holiday sessions.  Yet this is still a full 7 percentage points above the 20-day historical volatility.  With the stock trading around $132.50 the $135 straddle is worth around $6.86 which suggests the options are anticipating or pricing in about a $1.20 or less than a 1% price move.  This is assuming IV contracts to 17% following the report. 

Given the reaction to past earning’s reports, the third quarter numbers were very good but the stock sold on the news trading down  some 3.5%, the current premiums seem a bit low.  

Given that there will still be four full weeks until the February options expire buying a straddle or strangle here ahead of the earnings might make some sense.  You might take a small hit in the very short if the there is a muted response but I don’t think IBM will then just flat line at 52-week highs for the next month.

Disclosure: No Positions