Believing market rumors can cost you. And some options traders just found that out the hard way.
On Monday, IBM shares surged as much as 1.8 percent on the strength of a rumor that activist titan Carl Icahn was taking a stake in the company. Then, as the rumor was dispelled (at 2:13 p.m. ET, CNBC's Scott Wapner tweeted that Icahn has no involvement, citing sources) IBM shares lost most of their gains on the day.
In the options market, traders appeared to jump on the false rumor, with the weekly IBM calls seeing huge volume. The most popular options strike, the weekly 165-strike call, saw 9,275 contracts trade, for prices as high as 55 cents. Those who bought the contract at that level need to see IBM shares close Friday at $165.55 to make money—an unlikely prospect considering that IBM only traded as high as $163.86 in the session, and this is a short trading week expected to have low volume (Thursday is a holiday, and the market closes at 1 p.m. ET on Friday).
By the close of Monday's trading, with IBM shares down to $162.15 and the rumor dispelled, the chance of that trade paying off began to look unlikely indeed. And in fact, those weekly 165-strike calls lost 75 percent of their value in a matter of hours, closing the day with a value of just 15 cents.
"I am not a big fan of chasing short-dated options, especially in a holiday week like this, based on rumors," Dan Nathan of RiskReversal.com said on CNBC's "Fast Money."
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If one in fact wishes to get in on this underperformer, Nathan recommends a markedly different strategy.
"If you're going to go out and make a contrarian bet in a stock like this, you want to actually buy long-dated calls, and it makes a lot more sense than chasing these lotto ticket on a near-term basis," he said.
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