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Option Activity Alert: Are Speculators Truly Bullish on Focus Media Holding Limited?

There may be more than meets the eye to Wednesday's spike in call volume

by 12/11/2008 2:02:30 PM
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Shanghai-based advertising firm Focus Media Holding Limited (FMCN: View sentiment for FMCNsentiment, chart, options) has been a serious underperformer in 2008. The stock has dropped 85% year-to-date, thanks in part to staunch resistance from its 10-week and 26-week moving averages. These intermediate-term trendlines have pressured the shares lower since November 2007.

Weekly Chart of FMCN since October 2007 With 10-Week and 26-Week Moving Averages

Taking a closer look at the recent price action, FMCN gapped lower on November 11 after slashing its fourth-quarter outlook. Since that sharp sell-off, the stock has been trapped in a narrow trading range between the 6 and 9 levels.

Daily Chart of FMCN since October 2008

Despite its bleak technical performance, option players prefer calls over puts by an overwhelming margin. Yesterday, traders bought to open 4,771 calls and 205 puts on the International Securities Exchange (ISE), resulting in a single-day call/put ratio of 23.27. Meanwhile, on the Chicago Board Options Exchange (CBOE), investors purchased 3,042 calls and 173 puts. FMCN's single-day call/put ratio on the CBOE was a hefty 17.58.

In fact, the stock's 10-day ISE call/put ratio is 11.24, as more than 11 bullish bets have been purchased for every bearish option during the past 2 weeks. This ratio ranks higher than 98.4% of other such readings taken in the past year, which indicates that FMCN's ISE option volume has been more optimistically skewed less than 2% of the time in the previous 12 months.

Plus, Focus Media sports an inflated 20-day call/put ratio of 7.07, using data from both the ISE and the CBOE. This reading suggests that bullish contracts have been 7 times more popular than their bearish counterparts during the past 4 weeks.

It should come as no surprise, then, that FMCN's short-term options configuration is call-heavy. The stock's Schaeffer's put/call open interest ratio (SOIR) is 0.41, with calls more than doubling puts among options slated to expire within 3 months. This SOIR suggests that near-term speculators have been more optimistically aligned toward the shares just 23% of the time in the past year.

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