IBM selloff pushes options volatility near pandemic-era extremes

IBM shares lost about a quarter of their value on July 14 after the company disclosed preliminary second-quarter revenue below Wall Street expectations, according to CNBC. The decline, just over $73 to roughly $217, set off one of the sharpest single-day drops in the company’s modern trading history and drove options pricing to rare levels.

CNBC reported that IBM posted preliminary revenue of $17.2 billion, below analysts’ expectations of $17.9 billion. The shortfall was tied to a 7% decline in the company’s infrastructure division, a business line closely watched by investors assessing demand for legacy enterprise technology and hardware-linked spending.

IBM Chief Executive Arvind Krishna attributed the weakness to enterprise customers shifting spending away from the company’s traditional products, CNBC reported. Krishna said customers were conserving cash to buy hardware, servers and storage as they sought protection against AI-related supply shortages and potential price increases.

CNBC’s Michael Khouw said that explanation had not been independently verified as a broader market trend. The equity market reaction was immediate, with IBM’s one-day fall described by CNBC as the steepest in the author’s lifetime and on a scale not seen since Jan. 3, 1968.

Volatility stays elevated after the drop

The selloff also reshaped IBM’s options market. CNBC reported that one-month implied volatility was trading in the 99.6th percentile, an unusually high reading after a large earnings-related move. Implied volatility measures the market price of expected future movement, and elevated readings increase the premiums paid by option buyers and received by option sellers.

Khouw noted that implied volatility often falls quickly after company-specific news is released, a pattern traders refer to as volatility compression. In IBM’s case, CNBC said the measure remained above levels seen during episodes including the 2019 taper tantrum, the 2022 rate-hike bear market and tariff-related market stress. CNBC said only the 2020 pandemic selloff exceeded the current level.

At 1:23 p.m. EDT, CNBC’s quote page showed IBM at $212.99, down $4.08, or 1.88%, after the prior session’s larger decline.

CNBC highlights a short strangle structure

Khouw outlined an options structure based on the elevated premium: selling the Aug. 21, 2026, 190 put and the 245 call, known as a 190/245 short strangle. A short strangle involves selling an out-of-the-money put and an out-of-the-money call with the same expiry. The seller receives premium upfront and generally benefits if the stock remains within the range implied by the strikes and premium through expiration.

CNBC said the structure collected about $11.25 per strangle at the July 14 close. Relative to the underlying share price, that represented a 5.18% standstill yield over 38 days, according to Khouw’s figures.

The reported downside breakeven was $178.75, around 17.6% below the then-current stock price. The upside breakeven was $256.25, about 18.1% above the stock price. Khouw said IBM had not traded at the lower level since early 2024, while the upper level would require the stock to regain more than half of the July 14 decline before August expiration.

The strategy described by CNBC depends on IBM trading inside a wide range after the sharp repricing. Its appeal, as presented by Khouw, comes from selling options at a time when fear in the underlying shares has kept premiums elevated.

This story draws on original reporting from CNBC.