China-based social networking concern Renren Inc (NYSE:RENN - 4.70) was targeted for an anti-volatility play in the options pits yesterday, with one strategist selling both calls and puts to bet on a short-term trading range for the stock.
Specifically, symmetrical blocks of several thousand contracts changed hands at the July 4.50 put and the July 5 call -- all marked "spread." The puts traded for an average bid price of $0.13, while the calls crossed for an average bid price of $0.10, underscoring our theory of seller-initiated activity. Plus, open interest skyrocketed by more than 6,300 at each strike overnight, suggesting the trader established a short strangle on RENN for a net credit of $0.23 per pair of contracts.
The best-case scenario for the strategist is for RENN to finish between the $4.50 and $5 levels when July-dated options expire, rendering the contracts worthless and allowing him to retain the entire net credit. Furthermore, the trader can still pocket some of the initial premium received as long as RENN stays within the walls of $4.27 (put strike minus net credit) and $5.23 (call strike plus net credit). However, should RENN perforate either of these breakeven rails within the options' lifetime, the trader's losses will start to accumulate.
On the charts, it's not difficult to see why someone might bet on RENN to remain relatively stagnant for a few more weeks. Since gapping lower in mid-May, the equity has danced between support in the $4.30-$4.40 region and resistance around $4.80. Plus, the security could find an added layer of resistance courtesy of its descending 10-week moving average, which is now hanging out in the $5 area. This trendline ushered RENN higher in the first half of the year, but could now switch roles to serve as a technical roadblock.
Against this somewhat monotonous backdrop, demand for RENN's short-term options has been waning. In fact, the stock's Schaeffer's Volatility Index (SVI) now sits at an annual low of 51%, meaning RENN's near-term options are relatively cheap at the moment. As such, now might not have been the most ideal time to sell options premium on the equity.
Elsewhere, while the aforementioned spread strategist is expecting RENN to remain range-bound, it looks like others on the Street are bracing for a breach of support. Despite depleting by 23.5% during the past month, short interest still accounts for a healthy 7.3% of the stock's total available float, representing a week's worth of pent-up buying demand, at RENN's average pace of trading. The security's inability to capitalize on this unwinding of short positions hints at deep-seated weakness on the charts.
In the same skeptical vein, just one analyst deems RENN worthy of a "buy" or better rating. On the flip side, the stock sports eight "hold" or worse recommendations. Meanwhile, the average 12-month price target on the equity stands at a measly $4.97 -- just a hair's breadth from the stock's current price, and at the top of its recent trading window.
As contrarians, we like to see pessimism plaguing a stock -- but only when juxtaposed with a solid fundamental and technical backdrop. Unless RENN can flex some muscle on or off the charts, I wouldn't expect too many bears to abandon ship anytime soon.
The Case for Big Moves in IWM and QQQ
Featured Partners: AOL DailyFinance
© 2014 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242
Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email: firstname.lastname@example.org
All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.
Market Data provided by QuoteMedia.com | Data delayed 15-20 minutes unless otherwise indicated.