As reported in this morning's Opening View, call activity on insurance issue ACE Limited (ACE: sentiment, chart, options) accelerated at a faster pace than usual yesterday. More specifically, the stock saw nearly 21,000 bullish bets cross the tape – more than 7 times its average daily call volume of fewer than 3,000 contracts.
The recent preference for optimistic positions is further demonstrated by the security's plunging Schaeffer's put/call open interest ratio (SOIR). Since Monday, this ratio has tumbled from its perch of 1.01 (in the 67th annual percentile) to its current spot at 0.52 (in the 2nd annual percentile). In other words, not only do calls virtually double puts among options slated to expire within 3 months, but ACE's short-term options speculators are only 2 percentage points from an annual optimistic peak.
So, why the recent influx in bullish bets? It could be that, a day after the company reported third-quarter earnings, ACE chief executive Evan Greenberg inspired more people than Brian's Song. Most notably, the top brass virtually called a bottom for the beaten-down insurance sector. "The end of the soft market in insurance has arrived," Greenberg opined, implying that he expects premiums charged in most lines of commercial insurance to start inching higher.
In addition, the chief assured investors that Ace remains well capitalized, and predicted the company will emerge as "one of the winners" as the market struggles. What's more, Greenberg hinted of potential acquisitions in the future, but promised the firm will only make moves "that make sense for the shareholders."
As a result, Greenberg's comments helped the shares of ACE skyrocket about 37% from their intraday low on Tuesday to yesterday's high. In fact, the security has continued its recent journey into the black, currently trading near the 58 level, a gain of roughly 4%.
From a more historical perspective, this week's rally has helped the stock pare some of its recent losses, with ACE grazing the 35 level earlier this month. The equity is now poised to continue its multi-year trek higher, and is attempting to reclaim long-term support from its ascending 20-month moving average.
Meanwhile, in conjunction with the high hopes in the options realm is the sentiment among analysts. According to Zacks, ACE boasts an impressive 8 "strong buy" and 2 "buy" ratings, compared to a lone "hold" and no "sells." In addition, Thomson Financial reports that the average 12-month price target on the equity stands at $66.70 – less than 2 points above the shares' all-time high.
In conclusion, the enthusiasm for ACE in both the options pits and brokerage bunch is arguably warranted, considering the stock's impressive long-term technical performance. However, from a contrarian standpoint, putting all of your eggs in the bulls' basket doesn't always fare well. With the majority of the Street already in the bullpen, there could be a shortage of additional sideline cash to fuel the stock's quest for new highs. Should the insurance issue take a surprise turn for the worse – this time, without Greenberg's eloquence to revive the security – options traders and/or brokers could get spooked.
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