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AOL Pummeled By Short-Term Bears

Option traders are honing in on AOL's November 34 put

by 10/26/2012 11:41 AM
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The shares of AOL, Inc. (NYSE:AOL - 34.55) have pulled back to support at their 10-week moving average, which has ushered the stock roughly 140% higher over the past year. However, it looks like some option traders may be bracing for a short-term breach of support, or are establishing portfolio protection to lock in gains.

In early trading, AOL has already seen more than 6,700 puts change hands -- about 16 times its average intraday put volume. For comparison, just over 100 AOL calls have crossed the tape thus far. Attracting the most attention has been the November 34 put, which has seen more than 4,700 contracts traded on open interest of fewer than 3,400 contracts, pointing to newly opened positions. Plus, most of the volume transpired in one fell swoop at the ask price of $0.85, underscoring our theory of buyer-driven activity.

By purchasing the puts to open, the buyers are either trying to capitalize on a short-term slide for AOL, or are establishing options "insurance" on their AOL shares. The former group will profit if AOL breaches the $33.15 level (strike minus premium paid) within the next few weeks. The latter group is hoping for a rebound for AOL, since they're shareholders above all else, but have locked in a sale price of $34 per share, should the stock extend today's pullback.

From a sentiment standpoint, AOL is no stranger to skepticism on Wall Street. Despite outperforming the broader S&P 500 Index (SPX) by nearly nine percentage points during the past 60 sessions -- and touching an all-time high of $37.94 earlier this month -- AOL still has plenty of doubters in the bearish camp. Short interest accounts for more than 8% of the stock's total available float, representing more than a week's worth of pent-up buying demand, at the equity's average daily volume.

In the same vein, half the analysts following AOL still maintain "hold" or worse opinions. Likewise, the average 12-month price target on the outperformer sits at $34.58, representing a discount to AOL's closing price of $35.50 on Thursday.

Technically speaking, AOL has taken a breather from its longer-term ascent, and is now testing the waters atop its 10-week moving average. Should this trendline continue its role as a proverbial launching pad, the skepticism surrounding AOL could work to its advantage. A short-squeeze situation or a flood of upbeat analyst attention could translate into contrarian catalysts higher for the shares.

Weekly Chart of AOL since October 2011 With 10-Week Moving Average


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