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Pandora Media Inc (NYSE:P) plummeted 10% yesterday due to a stronger-than-expected debut from Apple Inc.'s (NASDAQ:AAPL) iTunes Radio. In a note to clients, Stifel said the new streaming radio service could cut P's listening hours by up to 15% within the next four to six months. The falling share price also landed Pandora on the short-sale restricted list, which in turn sparked heavy put trading. During the course of the session, around 53,000 puts changed hands -- three times the usual, and more than two times the number of puts. By far the most actively traded option was the October 24 put.
Volume at that strike was north of 9,900 contracts. The majority of the puts crossed at the ask price and open interest spiked overnight, suggesting the bearish bets were bought to open at a volume-weighted average price (VWAP) of $1.34. Therefore, in order to profit, the traders need Pandora -- currently sitting at $24.21 -- to drift south of $22.66 (strike less VWAP) by the closing bell on Oct. 18, when front-month options expire. If the shares fail to make the necessary move, the traders risk forfeiting the premium paid to create their long put positions.
From a broader perspective, P's performance on the charts yesterday was an exception rather than the rule. In fact, the shares have gained over 163% year-to-date, and have outperformed the broader S&P 500 Index (SPX) by close to 44 percentage points during the past two months. In fact, due to Pandora Media Inc's (NYSE:P) technical tenacity, it's possible some of Monday's put buying was of a protective nature, as shareholders attempted to lock in a minimum selling price in the event of an extended downturn.
Against this backdrop, implied volatility (IV) is on the rise. Since Sept. 11, the stock's 30-day, at-the-money implied volatility has spiked from 51% to 61.9% (a one-month high) at present.
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