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Big Blue in the wings

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After a lower open, stocks have been range-bound with the Dow Industrials (INDU) 8,049 -2.5%, S&P 500 (SPX.X) 859 -2.4%, NASDAQ-100 (NDX.X) 910 -4.2% and NASDAQ Composite (COMPX) 1,233 -3.82% trading tight ranges in the last three hours.

Dow 8,000 continues to hold support with a Dow Industrials low of 8,023 achieved in the last our as investor's await tonight earnings from Dow component and technology bellwether International Business Machine's (NYSE:IBM) $64.73 -5.49% earnings after the closing bell. Analysts as polled by Multex look for IBM to report earnings of $0.96 per share for the recent quarter.

Views among analysts look mixed as Lehman Brothers upgraded shares of IBM late last week to "overweight" from "equal weight," citing recent reductions in consensus earnings estimates and resulting ability to meet estimates, saying US stability is offsetting European weakness, which may lead to a slight improvement in 2003 IT spending, and likelihood that any 2003 estimate cuts would be modest ($0.05-$0.10 per share).

Then on Monday, Morgan Stanley said it believes that IBM did not experience the normal pickup in hardware orders in the last few weeks of the quarter, and that IBM's Microelectronics division remains the wildcard. Morgan Stanley cut its estimates on IBM's FY2002 EPS to $3.30 from $3.82 and 2003 estimates to $4.05 from $4.25.

With the Dow Industrials sitting just above its 8,000 level of psychological support, look for IBM's earning's to dictate market action tomorrow. A quick look at IBM trading near $65, might have an options trader looking at a strangle or straddle with a straddle at the October in a long position in both the IBM Oct. 65 calls (IBMJM) $2.30 and IBM Oct 65 puts (IBMVM) $2.40, which would take a move greater than $4.70, from current levels to have a short-term options trader seeing a gain. With today's market reaction to last night's earnings from Intel (NASDAQ:INTC) $13.57 -17.9%, along with some jittery bears in the market, a straddle or strangle trade may be a way for an option trader to make a 50/50 bet ahead of tonight's earnings.

A strangle would have an options trader looking at the October 60 puts (IBMVL) $0.95 and offsetting with the October $70 calls (IBMJN) $0.60. Here and options trader needs a move of $1.55 outside of the stated strikes.

Either trade has a trader looking for some VOLATILITY based on the potential unwinding of UNCERTAINTY.

Jeff Bailey

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