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Is Pandora Poised for a Pullback?

P bears bought December 10 puts

by 12/20/2012 8:43 AM
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Since tagging an all-time low of $7.08 in mid-November, the shares of Pandora Media Inc (NYSE:P - 9.46) have tacked on more than 33%. However, it looks like some options traders are anticipating headwinds in the $10 region, as evidenced by yesterday's appetite for short-term, round-number puts.

During the course of the session, the music mogul saw nearly 7,500 puts cross the tape -- a 77% mark-up to its average daily put volume. Most active was the December 10 put, which saw roughly 2,700 contracts change hands. The majority of the puts traded at the ask price, and put open interest at the front-month strike ballooned overnight, pointing to buy-to-open activity.

By purchasing the puts to open, the buyers are expecting P to remain in single-digit territory through the end of the week. More specifically, the contracts traded at a volume-weighted average price (VWAP) of $0.82, meaning the buyers will profit if P sinks beneath the $9.18 level (strike minus average premium paid) by tomorrow's close. However, even if the stock shoots higher in the next couple of sessions, the most the traders can lose is the initial premium paid for the puts.

From a broader sentiment standpoint, yesterday's affinity for bearish bets merely echoes the growing trend seen on the major options exchanges. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day put/call volume ratio of 0.69 ranks in the 75th percentile of its annual range. Or, in simpler terms, option buyers are scooping up P puts at a much faster-than-usual clip.

Elsewhere, short interest accounts for almost 28% of P's total available float. In fact, it would take about seven sessions to repurchase all of these pessimistic positions, at the equity's average pace of trading.

As alluded to earlier, P has been on a tear since touching a record low just over a month ago, and is on pace to end the week atop its 10-week and 20-week moving averages for the first time since late September. However, the security is now facing familiar resistance in the $9.50 region, which has acted as a barrier since October.

Weekly Chart of P since August 2012 with 10-Week and 20-Week Moving Averages


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