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CVS Caremark Traders Forecast a Quick Decline

Front-month put volume swells on CVS as expiration looms

by 11/15/2012 10:30 AM
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CVS Caremark Corporation (NYSE:CVS - 45.13) found itself in the bearish crosshairs yesterday, as roughly 34,000 puts changed hands during the course of the session -- more than quadrupling the equity's average single-session put volume. By comparison, fewer than 8,300 calls were traded. Wednesday's put players may have been enticed by the fact that CVS options are relatively cheap right now, as the security's Schaeffer's Volatility Index (SVI) of 16% ranks higher than just 15% of other such readings taken during the past year.

A number of speculators targeted the November 45 strike, where close to 10,400 puts crossed the tape -- the majority of them at the ask price, suggesting they were bought. These near-the-money contracts were exchanged at a volume-weighted average price (VWAP) of $0.07. This strike saw an overnight rise in open interest of 8,632 contracts, signaling the initiation of new positions. In order for traders to secure a profit from these bought-to-open puts, the stock must fall below $44.93 (strike price less the VWAP) by front-month expiration this Friday.

This surge in near-term put activity is keeping with CVS' current trend. In fact, the equity's Schaeffer's put/call open interest ratio (SOIR) sits at 1.62, with puts easily outstripping calls among options expiring in three months or less. This ratio hovers just three percentage points below a bearish peak, confirming short-term options players have rarely been more put-heavy toward the stock during the last 12 months.

Meanwhile, the equity's year-over-year gain of 18% seems to have elicited votes of confidence from the brokerage bunch. CVS currently boasts 14 "strong buys" and three "buy" endorsements, compared to two "holds" and not a single "sell" recommendation. Even more telling, the stock's average 12-month price target of $53.53 represents expected upside of almost 18% from Wednesday's closing price of $45.41.

In addition to CVS' 52-week advance, the stock has trekked 11% higher in 2012 alone. However, the equity is hovering below its 10-month moving average, which hasn't been breached on a monthly closing basis since September 2011. What's more, the shares surrendered 1.8% by the time the closing bell rang yesterday. Should the security keep declining prior to Friday's close, Wednesday's traders could end up collecting a profit on their bearish bets.


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