Despite a recent upswing in optimism toward Potash Corp. of Saskatchewan (POT: sentiment, chart, options) from the Wall Street analysts crowd, options players have taken the opposite path, choosing instead to load up on put positions. Specifically, data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) points toward a heavy degree of put buying, with the ISE/CBOE 10-day put call ratio of 1.99 revealing that puts bought to open have nearly doubled calls purchased during the prior two weeks. This ratio also ranks above all but three percent of those ratios taken during the past year, underscoring the extreme preference for bearish bets.
This negativity is also prevalent in POT's Schaeffer's put/call open interest ratio (SOIR). This ratio, which measures put open interest versus call open interest for the front three months of options, arrives at an annual peak of 2.13, revealing that traders have not been more bearish at any point during the past year.
The wave of pessimism from options trader has extended into today's activity, as put volume has ballooned to more than 22,000 contracts, according to our Intraday Volume Explosion List. In fact, put activity has more than doubled POT's daily average. The most popular strike on the day is the July 95 put, with some 15,400 contracts changing hands on open interest of 1,742 contracts.
The Anatomy of a Potash Put Position
Diving into the July 95 put volume, I noticed that the majority of this activity has traded at the ask price. The two largest such blocks totaled 15,000 contracts, and crossed the tape on the Chicago Board Options Exchange (CBOE) at 10:39 a.m. Eastern time for the ask price of $3.70. With volume easily exceeding open interest at this front-month strike, it would appear that we are looking at a purchased put position on POT.
Running with the put-buying theme, the total outlay for this position arrives at $5,550,000 -- (3.70 * 100) * 15,000 = $5,550,000. In order for these purchased puts to reach breakeven, POT would need to fall more than 19.6% to $91.30 per share, from Friday's close of $113.63 per share, by the time the options expire on July 17. The maximum loss on this position is limited to the initial investment of $5,550,000.
Below is a chart for a visual representation of returns for a purchased POT July 95 put:
As mentioned above, sentiment outside the options pits has been considerably more bullish, especially within the brokerage bunch. As early as June 1, BMO lifted its price target on POT to $155 per share from $100 per share and maintained its "outperform" rating. Meanwhile, Citigroup upgraded the shares to "buy" from "hold" on May 22, while Scotia lifted its price target to C$165 from C$150. Overall, seven of the nine analysts following POT rate the shares a "buy" or better, according to Zacks, with nary a "sell" rating to be found.
From a technical perspective, it would seem that bearish options traders may be onto something. Since peaking above the 120 level on June 1, POT has turned lower. The shares are now consolidating into potential support near the 110 level. This area also happens to be home to POT's rising 20-day moving average, below which the equity has not closed a session since April 28. A break below this technical support could place the stock in danger of additional losses, should the decline prompt Wall Street analysts to reexamine their ratings.
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