Schaeffer's Trading Floor Blog

News Spooks Outerwall Inc (OUTR) Bears, Shares Soar

Bearish positions may be unwinding on OUTR's earnings beat, buyback news

by 2/7/2014 2:42 PM
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Outerwall Inc (NASDAQ:OUTR) is up nearly 12% today to trade at $71.17, after announcing a flurry of positive developments yesterday afternoon, including a fourth-quarter earnings beat, an expanded stock buyback program, and a management shake-up. Right out of the gate this morning, the Redbox parent touched a record high of $72.58, as well. As we will explain below, part of today's rally may be the result of bearish option traders and shorts throwing in their proverbial towels.

For one, during the last five sessions at the Chicago Board Options Exchange (CBOE), OUTR has racked up a put/call volume ratio of 7.20, with more than seven puts bought to open for each call. Expanding the scope to include two weeks' worth of data from the CBOE -- as well as the International Securities Exchange (ISE) and NASDAQ OMX PHLX (PHLX) -- yields a still-lofty put/call volume ratio of 3.32. This ratio ranks in the 90th percentile of its annual range, suggesting speculators have rarely preferred long Outerwall puts over calls so strongly, relative to the past year.

In a similar vein, OUTR's Schaeffer's put/call open interest ratio (SOIR) checks in at 1.86, which is higher than all but 1% of readings from the previous 12 months. In other words, short-term traders have preferred puts on the stock, relative to calls, at a near-extreme rate.

Meanwhile, short sellers are no strangers to the automated kiosk king. In fact, over 40% of OUTR's total available float is sold short, which represents more than three weeks' worth of covering activity, at the stock's average daily pace of trading. As alluded to earlier, this could already be happening, as Thursday's good news may have forced the shorts to buy back the shares (and put buyers to unwind their bets, particularly at out-of-the-money strikes).

Elsewhere, the brokerage bunch has been extremely optimistic about Outerwall Inc's (NASDAQ:OUTR) prospects. Seven out of 10 analysts following the shares have given it a "strong buy" rating, compared to one "hold" and a pair of "strong sell" recommendations. Also, the equity's consensus 12-month price target of $75.33 was 18.3% higher than OUTR's closing price yesterday -- though that gap has largely closed after today's roughly 12% rally. This could lead to a series of price-target hikes, such as Benchmark's decision this morning to raise the stock's price target to $82 from $75.

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