Option players are displaying an optimistic bias toward Hewlett-Packard Company (HPQ: sentiment, chart, options). On Wednesday, traders on the International Securities Exchange (ISE) bought to open 7,532 calls on HPQ, compared to just 153 puts. The equity's single-day call/put volume ratio arrived at 49.23, revealing a distinct preference for bullish bets.
Yesterday's upbeat skew was no anomaly for the tech titan. HPQ sports a 10-day ISE call/put volume ratio of 2.63, with calls bought to open nearly tripling puts bought to open during the past two weeks. This ratio ranks higher than 88.4% of other such readings taken during the past year, indicating that traders on the ISE have purchased the equity's calls over puts at a faster pace less than 12% of the time during the past year.
In keeping with this theme, HPQ's Schaeffer's put/call open interest ratio (SOIR) arrived today at 0.59, in the second annual percentile. This extremely low reading suggests that short-term option traders have been more bullishly aligned toward the shares just 2% of the time during the past year.
Drilling down on Wednesday's action, the largest block trade was a group of 1,970 July 39 calls. These contracts crossed the tape at 3:21 p.m. at the ask price of $0.30, suggesting they were purchased. Open interest at this strike rose overnight from 5,113 contracts to 6,869 contracts, revealing that the calls were likely bought to open.
The equity's August 41 call was also active, with volume of 7,736 contracts trading on open interest of 10,625. It seems likely that many of these contracts were newly opened positions, with open interest at this strike arriving today at a notably inflated 16,080 contracts. A block of 1,000 calls changed hands at the ask price of $0.65 shortly before the closing bell, strongly indicating buy-to-open activity.
In today's trading, speculators have set their sights on HPQ's July 40 call. This option has seen 4,459 contracts trade on open interest of 5,698. Four separate blocks totaling 2,847 contracts have all changed hands at the ask price of $0.10, with implied volatility rising after each transaction. This data suggests that traders today are continuing their recent trend of buying to open new calls on the security.
However, this bullish option buying must be considered in the context of rising short interest. The number of HPQ shares sold short is up 18.2% during the past month, and surged by 22.5% during just the most recent reporting period. With buy-to-open call volume and short interest rising in tandem, it's possible that the option activity is being influenced by hedging.
In fairness, option players might also be responding to a recent bout of strength in HPQ shares. The stock has recently muscled its way to a gain of roughly 7% for 2009, and it has outperformed the broader S&P 500 Index (SPX) by approximately three percentage points during the past 40 days.
Currently, HPQ is cruising higher along its 10-week and 20-week moving averages. This double-barreled support has underlined the security's ascent since early April, and hasn't been breached once in the intervening months.
However, a longer-term look makes clear the motivations of short sellers. HPQ's rally has propelled it into a test of stubborn resistance at the round-number $40 region. This former support level has acted as a technical roadblock since late 2008, and could continue to stifle the stock's progress. Complicating matters further, HPQ's 20-month trendline is descending into the area, and could reinforce the $40 level's strength as resistance.
In other words, there seems to be a very valid reason for the fact that short interest and call buying are both on the rise: HPQ is extending its short-term uptrend, but the shares are staring down a critical test on the charts. Traders should keep an eye on the $40 area during the next few weeks to see how this battle plays out.
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