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Bearish Traders Pile On as Veeco Instruments Takes a Plunge

Goldman Sachs cut its rating and price target on VECO

by 9/24/2012 12:43 PM
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Veeco Instruments Inc. (NASDAQ:VECO - 31.62) is being heavily targeted by option players today, with both calls and puts trading at accelerated levels. However, with VECO surrendering nearly 11% thus far, puts are easily emerging as the options of choice. Nearly 2,000 put contracts have crossed the tape, representing 21 times the average daily volume for put options. By contrast, fewer than 800 calls have changed hands.

More than half of today's put volume has traded at the October 32 strike. With nearly all of the 1,100 contracts crossing at the ask price, implied volatility ticking 1.2% higher, and volume outweighing open interest, we can assume that new bearish positions are being created here today. By buying these puts to open for a volume-weighted average price (VWAP) of $1.58, traders are betting on VECO to continue its downward spiral, and fall below $30.42 (the strike minus the VWAP) by October expiration.

Today's preference for puts marks a divergence from what had been a growing trend in the options pits. Specifically, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 2.24 calls for every put, versus VECO's 50-day call/put volume ratio of 0.89. What's more, the shorter-term ratio ranks in the 63rd percentile of its annual range, suggesting calls have been picked up over puts at a faster-than-usual clip in recent weeks.

As touched upon earlier, this shift toward puts may have been prompted by today's analyst-induced plunge. Citing a "softer-than-expected outlook for LED capacity additions," Goldman Sachs this morning downgraded the stock to "sell" from "neutral," and trimmed its price target by $3 to $27.

Ahead of today's dip, though, VECO had been sporting an impressive 68.1% year-to-date advance. However, the stock has now lost its footing atop its 20-week moving average. The equity has only finished one weekly close below this trendline since early February.

Even more troubling, the stock could be at risk for another round of bearish brokerage notes. No fewer than seven covering analysts maintain a "strong buy" recommendation toward VECO. The equity could encounter another wave of selling pressure, should optimism among the brokerage bunch continue to wane.

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