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Morgan Stanley Option Traders Bet On a Near-Term Pullback

MS' December 19-strike put was targeted by bears on Wednesday

by 12/20/2012 10:09 AM
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Puts were in favor on Morgan Stanley (NYSE:MS - 19.17) on Wednesday. Around 31,000 contracts crossed the tape, more than double the average daily volume for put options. By comparison, roughly 24,000 calls changed hands. MS' December 19-strike put saw the heaviest volume, with nearly 9,400 contracts traded here. The majority went off at the ask price, implied volatility jumped 3.4 percentage points, and open interest soared overnight, indicating buy-to-open activity.

By purchasing these near-the-money puts, traders expect MS to fall below $18.80 (the strike minus the volume-weighted average price [VWAP] of $0.20) by tomorrow's close -- at which point the options expire. This breakeven level represents a 1.9% drop from current levels.

Delving into data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), yesterday's activity in the options pits was a change of pace for speculators. Over the course of the past 50 sessions, traders have bought to open 275 calls for every 100 puts. This call/put volume ratio of 2.75 ranks in the 84th percentile of its annual range, suggesting calls have been scooped up over puts at an accelerated clip in recent months.

On the charts, MS has fared well in 2012, with the shares adding nearly 27% on a year-to-date basis. Additionally, the stock has surged 56% off its annual low of $12.26, which it tagged on June 4. More recently, the equity has enjoyed a lift higher from its 10-day moving average, which has provided support for MS throughout most of December.

In light of this, Wednesday's put buyers could simply be shareholders protecting profits against a potential pullback. With the stock's Relative Strength Index (RSI) of 75 sitting solidly in overbought territory, a near-term consolidation isn't out of the question.


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