Shares of E*Trade Financial (ETFC) are finding out the hard way that heavy accumulations of call open interest can create quite a headache to a fledgling rally. The stock started off today's trading by rallying quickly above $5 per share, and has since held this position all day. However, the shares have been unable to stray further than 18 cents from the 5 level, calling into question the roll of heavy call open interest at the strike as a potentially limiting force.
Gravitational Pull at $5 Per Share?
We have been watching E*Trade (ETFC: sentiment, chart, options) for a while, with Elizabeth Harrow covering the shares in The Early Edge yesterday, and Nick Perry taking a technical look at the stock on Friday. Both Nick and Elizabeth zeroed in on potential resistance at the 6 level, but few have mentioned that 5 could also be a point of contention. Below is an intraday chart of ETFC, laying out the difficulties the shares have had during today's trading.
The Options Configuration
Checking in with ETFC's open-interest configuration, it is easy to see that the 5 strike is home to peak call open interest for the February series. As we have noted numerous times on SchaeffersResearch.com, these call-heavy strikes can create options-related resistance to any rally attempts from the underlying stock. Today's activity could also give credence to the belief that these same contracts can help limit any potential upside once the strike has broken.
March Looking Just as Grim
Unfortunately for ETFC, the options configuration for March looks eerily similar to February, with the 5 strike holding as the site of peak call open interest once again. Combine this options-related resistance with overhead technical resistance at the 6 level, and the shares could have a long road ahead of them, barring any outside influence.
External Forces?
ETFC has quickly gained more than 40% since the beginning of the year. While this may not seem like much for a $5 stock, any gains from the financial sector should not be overlooked at the moment. If ETFC can continue its winning ways, there is ample fuel to propel the shares even higher. For instance, Zacks.com reports that all 10 of the analysts following the shares rate them a "hold" or worse. With the company's restructuring starting to take hold, upgrades could certainly benefit the stock at this point.
The Bottom Line
The bottom line for ETFC bulls out there is to keep an eye on the 5 and 6 levels. If options resistance at the 5 level gives way (i.e. the stock manages to close solidly above this level for a couple days in a row), then technical resistance at the 6 level is all that stands between the shares and a continuation of their strength so far this year.
To read more of our analysis on the market's biggest stories, please visit our Schaeffer's Daily Market Blog section throughout the trading day.
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