Options Report: Some Positive Chemistry in the Chemicals Sector

              

The chemicals sector has been overshadowed this year by the flashy performance of the tech sector. However, the components of the chemical sector have put in a solid performance, as the S&P Chemicals Index (CEX) has stair-stepped higher, creating a series of higher highs and higher lows. During this time frame, the index has been helped by the support of its ascending 10-week and 20-week moving averages. Furthermore, it appears that the CEX is poised to springboard higher off the support of its 20-week trendline.

Despite the sector's impressive performance, traders remain skeptical. The composite Schaeffer's put/call open interest ratio for the sector stands at 0.85, which is higher than 70.6% of all those taken during the past year. In addition, only 48% of the 258 analyst rankings on sector components come in at a "buy." An unwinding of this bearish sentiment could provide a boost.

Terra Industries (TRA)

Terra Industries Inc. (TRA: sentiment, chart, options) ranks among the leading North American producers of nitrogen fertilizers, according to Hoover's. Through its North American nitrogen plants, it produces ammonia, urea, urea ammonium nitrate solution, and ammonium nitrate. Terra operates plants in the U.S., Canada, and the U.K. through subsidiaries, joint ventures, and limited partnerships. The company sells its products to dealers, retailers, cooperatives, and chemical companies.

Technically speaking, TRA has soared more than 115% since the beginning of 2009, putting in an outstanding performance. The stock's stellar run higher has been helped by support at its 10-week and 20-week moving averages. The security is currently consolidating its gains under short-term resistance at the 37 level.

Traders have turned their backs on TRA and are attempting to call a top to the stock's rally. The Schaeffer's put/call open interest ratio comes in at 0.79, which is higher than 87% of all those taken during the past year. In other words, short-term options players have been more pessimistically aligned toward the shares only 13% of the time during the past 12 months.

In addition, the International Securities Exchange (ISE) has seen an increase in put trading recently. The ISE 10-day put/call volume ratio comes in at 0.86, which is higher than 78% of all those taken during the past 12 months.

A shift among options players to the more bullish end of the stock's sentiment spectrum could increase buying pressure on the security. Traders should consider the stock's January 2010 35 call to capture gains should the stock breach resistance at the 37 level.

Airgas Inc. (ARG)

Airgas Inc. (ARG: sentiment, chart, options) has floated to the top of the industrial gas distribution industry by buying up more than 400 companies since its founding in 1986, according to Hoover's. The company's North American network of more than 1,100 locations includes retail stores, gas fill plants, specialty gas labs, production facilities, and distribution centers. Airgas distributes argon, hydrogen, nitrogen, oxygen, welding gases, and a variety of medical and specialty gases.

From a technical perspective, ARG has edged roughly 19% higher since the beginning of 2009. The equity has stair-stepped higher since March with help from its ascending 10-week and 20-week moving averages. In fact, it appears that the shares of ARG are in the process of bouncing off support at their 20-week trendline.

Meanwhile, traders remain skeptical of the shares. The International Securities Exchange (ISE) has seen an increase in put trading recently. During the past 10 trading sessions, more than 11 puts have been purchased to open for every one call purchased to open. This ratio of puts to calls is higher than 92% of all those taken during the past 52 weeks, pointing to a growing pessimism.

In addition, the ISE/Chicago Board Options Exchange (CBOE) 10-day put/call volume ratio comes in at 7.42, which is higher than 86% of all those taken during the past 12 months.

Finally, the Schaeffer's put/call open interest ratio for ARG stands at 1.03, as put open interest outnumbers call open interest among options slated to expire in less than three months. This reading is higher than 68% of all those taken during the past 12 months, indicating a bearish bias toward the shares.

A shift among options players toward the bulls' end of the spectrum could attract buying pressure. Traders should look to the stock's January 2010 45 call to capture a profit on the shares, should they continue their uptrend.

Koppers Holdings (KOP)

Hoover's states that Koppers Holdings Inc. (KOP: sentiment, chart, options) makes carbon compounds and treated-wood products for the chemical, railroad, aluminum, utility, construction, and steel industries around the world. The company's manufacturing facilities are located in Asia, Australia, Europe, and North America.

Looking at the stock's technical performance, we find that the security has soared more than 33% since the start of the year. After a recent pullback, it appears that KOP is rebounding off support at the 25 level. In addition, the stock is in the process of reclaiming support at its 10-week and 20-week moving averages, which have guided KOP higher since late March.

Sentiment is growing more optimistic toward the shares, as the International Securities Exchange (ISE) has reported an increase in call trading. During the past 10 trading sessions, 32 calls have been purchased to open for every one put purchased to open. This ratio of calls to puts is higher than 93% of all those taken during the past 12 months, pointing to a growing optimism.

However, sentiment is far from an optimistic extreme. The Schaeffer's put/call open interest ratio comes in at 1.22, as put open interest outnumbers call open interest among options slated to expire within three months. What's more, this ratio is higher than 59% of all those taken during the past 12 months, pointing to a bearish bias among short-term options traders. An unwinding of these bearish bets could boost the stock higher. Traders should consider the security's March 25 call.