Are Shorts Hedging Their Bets on USG Corporation?

Call players descended on USG Corporation (USG) yesterday, with volume rocketing to seven times the usual levels. During the course of the session, traders on the International Securities Exchange (ISE) bought to open 2,403 calls on USG, compared to just nine puts.

The most active strike was the December 17.50 call, where 6,472 contracts crossed the tape on open interest of 1,255. About 59% of these calls traded near the ask price, suggesting they were purchased, and implied volatility jumped 8.5% as a result. Today, open interest at this strike stands at 5,006 contracts, confirming that new bullish bets were added here on Monday.

In fact, bullish options have rarely been in greater demand on the ISE. USG's 10-day ISE call/put volume ratio checks in at 16.10, which ranks in the 95th annual percentile -- just five percentage points from a 52-week peak of optimism.

However, it's worth noting that short interest accounts for a lofty 16.1% of the equity's available float, or 6.1 times USG's average daily trading volume. In this context, it's possible that some shorts are buying calls to hedge their bearish stock positions.

From a technical perspective, USG is fresh off a rejection at its 20-month moving average, which has acted as staunch resistance since July 2006. Meanwhile, potential support from the stock's 10-month moving average lies a few points south.

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