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The Street Buys Into Regions Financial's $900M Stock Offering

Option activity is accelerated on RF in today's session

by 3/14/2012 1:20:56 PM
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Results of the Fed's stress tests have fueled options activity on Regions Financial Corporation (RF - 6.17) in today's session, with calls and puts trading at nine times and seven times their respective average intraday volumes. Calls have emerged as the options of choice, however, with roughly 21,000 contracts crossing the tape. By comparison, fewer than 7,400 put contracts have changed hands.

Today's trend toward calls is just a continuation for RF, as indicated by the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.57, which ranks in the 25th percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward the security. Also, RF's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 4.51 ranks higher than 78% of other such readings taken in the past year -- indicating that bullish bets have been scooped up over bearish ones at accelerated levels in recent months.

This optimistic outlook has spilled over outside of the options arena, as well, where short interest accounts for a low 1.8% of the stock's available float. It would take just over one session to cover these shorted shares, at RF's average daily trading volume.

These idealistic investors are cheering the stock's 7% jump in today's trading, as Wall Street is buying on RF's passing stress-test grade, as well as the company's announcement of a $900-million stock offering. The proceeds will be used to repay a portion of its outstanding Troubled Asset Relief Program (TARP) bailout, as the Alabama-based financial firm is the only bank still on the hook to the U.S. government. Today's jump positions RF north of its 80-week moving average -- a trendline toppled only twice, on a weekly closing basis, since May.

Weekly Chart of RF since May 2011 with 80-Week Moving Average

From a contrarian perspective, RF may be poised to continue in its positive price direction in the near term. With Zacks reporting that 80% of analysts maintain a "hold" or worse suggestion toward the stock, and the average 12-month price target of $5.93 representing a discount to the equity's current perch, a shift in sentiment could assist RF in its trek higher. In fact, an early morning price-target hike to $7 from $6 at Evercore opens the door for other bearish brokers to follow suit.

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