We'll Take IBM for $77,147, Alex

02/17/2011 12:13 pm EST


IBM’s new computer just beat two ’Jeopardy!’ champs at their own game, and the stock could surprise the deeply skeptical options players as well, writes Sarah Wasserman of Schaeffer’s Investment Research.

So, I've admitted many times that I'm kind of a nerd--and if you didn't believe me before, I'm sure my latest confession will change your mind.

I watch“Jeopardy!” on a regular basis and was kind of stoked for this week's epic "Watson" battle. For those of you who haven't been watching--or don't want to admit that you have been watching--Watson is a computer system designed by IBM (NYSE: IBM) to analyze the intricacies and nuances of the English language. And what better way to demonstrate this than by having Watson compete on “Jeopardy!” with two of the show's top winners?

After a three-day game which began on Monday, Watson easily beat “Jeopardy!” champions Ken Jennings and Brad Rutter (for the record, Watson won with $77,147, compared with Jennings' $24,000 and Rutter's $21,600.)

With Watson making history this week, it seems only fair to take a quick look at how IBM has been doing from both a technical and sentiment perspective.

Winning Like a Machine
Like Watson, IBM has been on a roll lately, racking up gains of nearly 11% since the start of 2011. In fact, during the past 40 sessions, IBM has outperformed the broader Standard & Poor’s 500 index by nearly 6%. During this time, the stock has relied on the solid support of its 20-day moving average, which has acted as a springboard higher for the shares on several occasions. In fact, IBM is currently in the process of pulling back to this important trendline.

Daily Chart of IBM Since December 2010 With 20-Day Moving Average

However, despite the stock's technical prowess of late, option players have seldom been more bearish toward the equity. For starters, IBM's Schaeffer's put/call open interest ratio (SOIR)--which measures put open interest relative to call open interest among options in the front three months--is currently docked at 1.76, in the 96th annual percentile. In other words, short-term traders have been more bearishly aligned toward IBM only 4% of the time.

Uncharitable Humans
Similarly, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.1 IBM puts for every call purchased during the past two weeks. This ratio of puts to calls ranks above 92% of all other readings taken during the past 12 months, pointing to near-peak levels of bearish speculation on the tech issue.

This skepticism is well-illustrated by IBM's February open interest configuration. The 155 strike houses peak put open interest of over 7,900 contracts, while the 160-strike put carries a substantial 6,519 contracts in open interest. With the tech issue hovering around $163, both of these front-month puts are easily out of the money.

In other words, the short-term outlook is looking promising not only for Watson but also for IBM. As contrarians, we know that an abundance of pessimism levied toward a technically strong stock can actually make for a compelling bullish case--and IBM is no exception. With the stock perched atop strong technical support, a reversal of sentiment from the bears--especially as Friday's expiration nears--could help launch the tech issue on the next leg of its uptrend.

[With the entire tech sector on a roll, Paul McWilliams likes three well-known names--Editor]

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