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Option Bears Bet Against Sears on News of Store Closures

Put volume continues to soar on SHLD

by 12/28/2011 10:06 AM
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Put players converged on Sears Holdings Corporation (SHLD - 33.19) yesterday, after dismal holiday sales prompted the company to announce plans to close a number of its Sears and Kmart stores. As a result, roughly 28,000 of these options crossed the tape, reflecting eight times the equity's average daily put volume. Nearly 5,600 puts were exchanged at the out-of-the-money January 2012 25 strike -- roughly half of them at the ask price, pointing to buyer-driven activity. Open interest on this option rose by 4,105 contracts overnight, suggesting that most of the volume at this strike consisted of newly opened positions -- and more than 4,700 contracts have been exchanged at the January 25 put already in today's trading.

From a broader sentiment standpoint, the preference for puts over calls is nothing new for SHLD. The Schaeffer's put/call open interest ratio (SOIR) sits at 1.42, confirming that puts comfortably outnumber calls among options expiring within three months. This ratio ranks in the 67th percentile of its annual range, which means that short-term options players have been more pessimistically aligned toward the stock just 33% of the time during the past year.

What's more, SHLD's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio checks in at 3.31, conveying that puts bought to open have more than tripled calls during the past couple of weeks. This ratio registers in the 95th annual percentile, signaling that traders have been snatching up bearish options over bullish at a much faster-than-usual pace.

Technically, SHLD has shed almost 55% of its value year-to-date, and has underperformed the broader S&P 500 Index (SPX) by close to 45% during the past 40 sessions. On the charts, the stock is trading well below its 10-day and 20-day moving averages, both of which have served as resistance since early November. In fact, the equity just tagged a multi-year low of $31.94 within the first hour of the session.

At last check, SHLD is down about 0.6% to hover at the $33.19 level.


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