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E*Trade Blitzed by Near-Term Option Bears

ETFC's October-dated long puts are red-hot

by 10/16/2012 12:44 PM
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Put players have pounced on E*Trade Financial Corporation (NASDAQ:ETFC - 9.24), with investors seemingly scooping up soon-to-expire contracts on the equity. Around midday, the online brokerage firm has seen roughly 17,000 puts cross the tape -- about 29 times its typical intraday put volume. For comparison, fewer than 400 ETFC calls have traded thus far.

Digging deeper, nearly all of the action has centered on the at-the-money October 9 put, which has seen more than 16,200 contracts change hands. Most notably, a block of 13,086 contracts crossed for $0.15 -- closer to the ask price, suggesting they were bought. Plus, implied volatility on the front-month put was last seen 11.6 percentage points higher, hinting at fresh initiations.

By purchasing the puts to open, the buyers are bracing for a short-term pullback for ETFC. Specifically, the investors will profit if ETFC breaches the $8.85 level (strike minus premium paid) by Friday's close, when October-dated options expire. What's more, while this shelf-life may be short, it also encompasses the company's turn in the earnings limelight, with E*TRADE slated to report its third-quarter figures after the closing bell on Thursday.

However, bearish bets have become par for the course among ETFC speculators. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.47 stands higher than 79% of all other readings of the past year. Or, in simpler terms, option traders have bought to open ETFC puts over calls at a quicker-than-usual step during the past couple of weeks.

In the same vein, the security's Schaeffer's put/call open interest ratio (SOIR) sits at 1.10, in the 88th percentile of its annual range. In other words, near-term options players are more put-biased than usual right now.

Elsewhere on Wall Street, the brokerage bunch is also skeptical of ETFC. Currently, the stock harbors just two "buy" or better ratings, compared to eight "hold" or worse suggestions. Meanwhile, the consensus 12-month price target on the equity rests at $9.10, representing a discount to ETFC's closing price of $9.16 on Monday.

On the charts, the shares of ETFC have tacked on 29% since tagging an annual low of $7.08 in late July, ushered higher atop their 10-week moving average. Now, the stock is attempting to conquer its 60-week trendline, which has stifled ETFC's advances in four of the past five weeks.

Fundamentally speaking, the aforementioned bears have historical cause to be wary of ETFC ahead of earnings. According to Thomson Reuters, the firm has fallen short of analysts' bottom-line estimates in three of the past four quarters.


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