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Are Lowe's Option Bears Getting Spooked?

LOW traders targeted front-month, out-of-the-money puts

by 1/2/2013 10:18 AM
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The shares of Lowe's Companies, Inc. (NYSE:LOW - 36.19) have shot higher right out of the gate -- much to the dismay of recent option traders. On Monday, the home-improvement retailer saw roughly 10,000 puts cross the tape, more than doubling its average single-session put volume. For comparison, fewer than 1,800 LOW calls were exchanged.

Digging deeper, most of the action centered around the out-of-the-money January 2013 30- and 33-strike puts, which saw around 2,900 and 3,100 contracts change hands, respectively. Nearly all of the puts crossed at the ask price, and put open interest swelled at both front-month strikes over the holiday, pointing to buy-to-open volume.

More specifically, the 30-strike puts traded at a volume-weighted average price (VWAP) of $0.12, meaning the buyers will profit if LOW breaches the $29.88 level (strike minus VWAP) within the next couple of weeks. Meanwhile, the VWAP of the 33-strike puts was $0.26, indicating a breakeven level of $32.74 for the buyers.

As alluded to earlier, though, Monday's option bears may be ruing their new positions today. At last check, LOW has jumped 1.9% to wink at the $36.19 level -- just a hair's breadth from a record high of $36.47, tagged about a month ago. However, considering LOW advanced nearly 40% in 2012, the aforementioned out-of-the-money put buyers could've been shareholders protecting their profits from a short-term pullback.

Whatever the motive, Monday's affinity for near-term puts is just more of the same for LOW. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.15 indicates that puts outnumber calls among options with a shelf-life of three months or less. Even more telling, this ratio stands higher than 83% of all other readings of the past year, suggesting short-term speculators are more put-biased than usual right now.


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