Option Activity Watch: AMEX Financial Select Sector Fund, AT&T, Tesoro

              

A daily feature available on SchaeffersResearch.com is "Option Activity Watch." Every day, we'll focus on three stocks that generated a great deal of option trading. We hope that this will effectively offer stock information, particularly on equities that are currently popular among those in the investing community.

Ma Bell is seeing some heavy call trading this afternoon. AT&T's (T: sentiment, chart, options) July 20 call has had more than 10,100 contracts cross the tape on open interest of more than 16,500. Overall, sentiment scrambled over into the bulls' camp recently. The equity's Schaeffer's put/call open interest ratio (SOIR) has dropped to 0.71 and is lower than 79 percent of all readings taken over the past 52 weeks. Furthermore, short interest plunged by 10 percent in March to 18.6 million shares – a new multi-year low. The stock's short-interest ratio now rests at a meager 3.52 days to cover. Meanwhile, Wall Street is still panning the shares, with all 17 of the analysts following T rating it a "hold" or worse.

Technically speaking, T jumped above its 10-day and 20-day moving averages today. The stock has not enjoyed a daily close above both of these short-term trendlines since March 7. On the other hand, the stock is hitting resistance at its weekly moving averages and at the 20 level. The 20 region has capped the equity's rally attempts since January 2004. From a longer-term perspective, T is being squeezed between resistance at the 20 level and support at its 20-month moving average in the 18.50 region. Traders should keep a close eye on the stock's 20-month trendline, as a breach of this support level could send the shares sharply lower.

Tesoro (TSO: sentiment, chart, options) is an independent oil refiner and marketer with six refineries in Alaska, California, Hawaii, North Dakota, Washington, and Utah. The security has been the focus of some heavy options trading this afternoon, with more than 2,000 contracts crossing the tape at its May 22.50 put. With open interest of roughly 3,000 contracts, we shall have to wait until tomorrow to see if this surge in volume translates into new positions. Checking in on the stock's sentiment indicators, we find that investors are still quite optimistic about the shares. The security's SOIR sits at 0.79 in the 20th percentile. In addition, short interest edged one percent lower last month to 3.5 million shares, resulting in a short-interest ratio of 2.88 days to cover.

As with T, Wall Street still has its doubts about the firm. According to Zacks, six of the 13 analysts following T rate it a "hold" and two rate it a "strong sell." This leaves ample room for potential upgrades.

From a technical perspective, the shares have resumed their rally higher, gapping above resistance at the 38 level. What's more, TSO continues to rally along the support of its 10-week and 20-week moving average. In fact, TSO has enjoyed the flawless support of its ascending 10-month trendline since March 2003.

The equity's stellar technical performance combined with pessimism from the Street has earned the security a Schaeffer's Equity Scorecard ranking of 7.0 out of 10.

The financial sector has seen optimism recently explode. The exchange-traded fund (ETF) AMEX Financial Select Sector Fund (XLF: sentiment, chart, options) has attracted some heavy call trading today, as options speculators pile into the equity's June 29 strike. More than 7,200 contracts have changed hands this afternoon on open interest of roughly 12,000 contracts. What's more, the ETF's SOIR has dropped from 3.82 on March 22 to its current perch of 1.97 (in the 37th percentile).

On the other hand, short interest surged 53 percent higher in March to 40.5 million shares – a new multi-year high. The equity short-interest ratio rest at 5.16 days to cover, providing ample fuel for a potential short-squeeze rally.

From a technical perspective, the shares have drifted lower since hitting a January high under resistance at their 10-day and 20-day moving averages. Furthermore, the XLF has breached former support at the 29.40 level. To make matters worse, the ETF closed below its 10-month and 20-month moving average in March for the first time in roughly two years.

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