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Wall Street Loves to Hate Underperforming RadioShack

Put options have rarely been more popular on downtrodden RSH

by 5/22/2012 12:19:38 PM
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Electronics retailer RadioShack Corporation (RSH - 4.77) has already swallowed a hefty loss of 51.2% so far in 2012, but quite a few traders are betting on a continued slide for the stock. On Monday alone, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) bought to open 3,298 puts on RSH, compared to just 109 calls. The resulting single-day put/call volume ratio of 30.26 highlights a strong preference for bearish bets over bullish.

In fact, RSH has racked up a 10-day put/call volume ratio of 1.48 on the ISE, CBOE, and PHLX. This reading ranks in the 92nd percentile of its annual range, indicating that traders have scooped up puts over calls at a faster-than-usual pace during the past couple of weeks.

From a longer-term perspective, traders on these exchanges have purchased 1.06 puts for every call on RSH during the past 50 sessions. This ratio ranks above 97% of comparable readings taken over the past 52 weeks, confirming a remarkably strong skew toward puts over calls on the retailer.

Further echoing this pessimistic slant is the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.02. Not only does this ratio indicate that puts outnumber calls among options slated to expire within three months, it also ranks in the 98th annual percentile. In other words, short-term options players have been more put-heavy only 2% of the time during the past year.

Near-term traders have shown an overwhelming preference for 5-strike puts. The June 5 strike is home to peak front-month put open interest of 4,302 contracts, while the July 5 strike carries peak back-month put open interest of 6,933 contracts.

Elsewhere, quite a few short sellers are also looking for a deeper decline from RSH. Short interest rose by 7.7% during the past two reporting periods, and now accounts for a lofty 36% of the equity's float. At the stock's average daily trading volume, it would take more than six sessions for all of these shorted shares to be covered.

From a technical perspective, RSH is currently testing resistance at its 20-day moving average, which has highlighted the security's swoon since late January. In addition to its hefty year-to-date deficit, the shares are down more than 69% over the past 52 weeks, and they're trading just a stone's throw from record-low territory.

Daily Chart of RSH since January 2012 With 20-Day Moving Average

That said, the ample supply of pessimism levied against the stock is worth noting, from a contrarian standpoint. In addition to the glut of bearish bets from options traders and short sellers, analysts have doled out just one "buy" out of 21 total recommendations. With so much negative sentiment already priced into the shares, additional downside could be limited during the near term.

In fact, the high short-to-float ratio for RSH leaves the door open for potentially sharp, sudden moves higher, which could cause a stampede for the exits among some of the weaker bearish hands.

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