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Hewlett-Packard Option Players Wager on an Earnings-Driven Slide

Short-term speculators are buying to open HPQ's weekly 13-strike puts today

by 11/15/2012 2:40 PM
Stocks quoted in this article:

An early morning bearish brokerage note has prompted option players to pick up Hewlett-Packard Company (NYSE:HPQ - 13.05) puts today. Around 26,000 contracts have changed hands, which is about a 65% improvement from the expected intraday put volume. Meanwhile, approximately 16,000 call contracts have crossed the tape, roughly on par with the average intraday pace for call options.

Short-term speculators are betting on a continued slide for the struggling stock, and have turned their attention to HPQ's weekly 13-strike put. Of the nearly 2,700 contracts that have been traded, 78% have crossed at the ask price, and there are currently no open positions at this strike. In other words, it's safe to assume new positions are being initiated here.

By buying these puts to open, traders will begin to profit with each step south of $12.66 (the strike minus the volume-weighted average price of $0.34) HPQ takes through next Friday, at which point these options will expire. This represents a slight 3% drop from current levels.

Today's tendency toward puts is a change of pace in the options pits, as evidenced by data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Over the course of the past 10 sessions, traders have bought to open more than three calls for every put. What's more, this call/put volume ratio of 3.08 ranks higher than 90% of similar readings taken in the past year, indicating bullish bets have been scooped up over bearish at a near annual-high clip in recent weeks.

Echoing the withstanding preference for HPQ calls among option players is the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.70. Not only does this show that call open interest outweighs put open interest on options expiring in three months' time, but it ranks in the 15th percentile of its annual range. Simply put, short-term speculators are more call-heavy than usual toward HPQ.

Considering the stock's dismal 50% year-to-date deficit, as well as a healthy short interest-to-float ratio of 5%, the campaign for calls in recent weeks could represent short sellers picking up hedges on their pessimistic positions. However, HPQ's dreary technical performance in 2012 is being highlighted in today's session, with the previously mentioned brokerage note ushering HPQ down to the $12.97 mark -- its lowest trading price since October 2002. Given today's option activity, this milestone is not being lost on the weekly put buyers.

Additionally, the Dow component is slated to take its turn at the earnings plate next Tuesday. Although HPQ has bested analysts' expectations in each of the last four quarters, today's bears could be hoping an earnings miss will push the stock below breakeven. Should the stock fail to succumb to an earnings-induced downturn, the most the traders can lose is the initial debit paid.

For HPQ's fourth quarter, Wall Street is calling for a per-share profit of $1.14.


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