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A roughly 2% pullback by AOL, Inc. (NYSE:AOL - 37.01) shares on Wednesday had near-term bears betting on continued downside through the end of the week. Puts were easily the options of choice, trading at more than two times their average daily volume. Of the 5,262 contracts that changed hands, 79% crossed the tape at AOL's February 37 put. The vast majority of these went off at the ask price, implied volatility ticked 6.8 percentage points higher, and open interest added 2,952 positions overnight, hinting at buy-to-open activity.
In order for these near-the-money puts to be profitable, AOL needs to finish tomorrow's session -- when front-month options expire -- south of $36.40 (strike minus the volume-weighted average price of $0.60). This breakeven mark is a 1.6% slide from current levels. At last night's close, delta for this put was docked at negative 0.49, or 49%, representing a roughly 1-in-2 chance the option will be in the money at expiration.
Wednesday's bearishly skewed bias among near-term option traders highlights a broader trend, as evidenced by the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.02. This ratio ranks in the 78th percentile of its annual range, suggesting short-term speculators are more put-heavy than usual toward the stock.
Even more telling, perhaps, is the equity's front-month gamma-weighted SOIR of 1.42, which shows that puts outweigh calls at near-the-money strikes in the soon-to-expire February series of options. Delving deeper, hefty put open interest currently resides at the aforementioned February 37 strike. This underfoot layer could act as a foothold for the stock as the nearly 3,600 contracts that reside here begin to unwind over the next two sessions.
On the charts, AOL has been a long-term leader, with the stock nearly doubling in value on a year-over-year basis. More recently, the equity has added an impressive 25% in 2013, as well as outperformed the broader S&P 500 Index (SPX) by almost 20 percentage points in the past month. Additionally, last Friday's well-received earnings report sent the security soaring, and AOL effectively filled its late-November bearish gap, suggesting an additional layer of support could be emerging.
Should the stock maintain this upward momentum through tomorrow's close, the most Wednesday's put buyers will be out is the initial premium paid.