In last week's edition of Trading Tools, we examined shipping issue Excel Maritime Carriers (EXM), as it appeared on the Zacks Put/Call Ratio Greater than 1.0 filter. However, utilizing the Zacks Unusually High Option Volume screener today, a different security caught my eye: The Dow Chemical Company (DOW: sentiment, chart, options), a Michigan-based manufacturer of plastic materials, agricultural products, and – you guessed it – chemicals.
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Besting Expectations
Dow Chemical took its turn in the earnings confessional on Thursday, reporting a first-quarter profit of $24 million, or 3 cents per share - 97% lower than its net income of $941 million, or 99 cents per share, a year ago. Excluding items, however, the firm said it earned 12 cents per share, besting the Street's expectations for a per-share loss of 21 cents. Helping offset demand issues were feedstock and energy costs, which fell by nearly half in the first quarter. In addition, the company said the closing of plants and payroll cuts resulted in savings of $270 million compared to the period a year earlier.
Though Chief Executive Andrew Liveris said he expects 2009 to be "a recessionary year globally," he remained optimistic, stating "we actually have seen a few bright spots and some moderation in the pace of decline in the industry." In addition, Liveris said the firm is "very seriously engaged" with some "very serious bidders" for Dow's agriculture unit, Dow AgroSciences.
As a result of the pleasant surprise, the shares of DOW skyrocketed 18% yesterday – and fueled a mad dash for call positions on the stock.
Bulls Battle Back
According to Zacks, DOW saw nearly 38,000 calls change hands on Thursday – two-and-a-half times the security's average single-day volume of fewer than 15,000 bullish bets. Most active was the equity's near-the-money May 15 call, which saw roughly 8,500 contracts cross the tape. However, the 12.50 strike remains home to peak call open interest in the front-month series, with about 21,300 contracts in residence. In addition, the May 11 strike harbors nearly 14,500 open call positions, while the round-number 10 strike is home to more than 10,000 calls.
The optimistic uprising stands in contrast to the sentiment among short-term options speculators. The chemical concern's Schaeffer's put/call open interest ratio (SOIR) – which measures options slated to expire within three months –rests at 1.03, in the 72nd annual percentile. In other words, near-term traders have been more bearishly biased toward DOW only 28% of the time during the past year.
Word on the Street
Joining options bettors on the bearish bandwagon are analysts. The stock currently harbors only one "buy" or better rating, Zacks reports, compared to six tepid "holds" and two "sell" or worse ratings. On that same note, Thomson Reuters pegs the average 12-month price target on the stock at $15.28 – nearly a point below DOW's intraday high today.
However, after glancing at the charts, these skeptics could get spooked. Since grazing the 6 region in mid-March, the shares of DOW have more than doubled. In fact, the stock has outperformed the S&P 500 Index (SPX) by a whopping 93% during the past 40 trading sessions. What's more, the equity is poised to close its second consecutive week atop its 20-week moving average – a trendline that, in conjunction with its 10-week counterpart, guided the shares into the red during most of the past year.
Should DOW's recent rally shake loose some bears, the stock could inch higher. A reversal in sentiment in the options arena, or a fresh wave of upgrades and/or price-target boosts, could place additional buying pressure on the equity.
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