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Option Bears Mob Morgan Stanley Ahead of Stress Tests

Eleventh-hour skeptics are scooping up MS put options

by 3/14/2013 12:27 PM
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Option bears are pouncing on Morgan Stanley (NYSE:MS - 22.74) today, as traders place their bets ahead of a key post-close announcement from the Federal Reserve. At last check, the banking behemoth has seen around 78,000 puts cross the tape -- more than four times its average midday put volume, and around eight times the number of MS calls exchanged.

Most active by a mile is the March 22.50 put, where more than 62,000 contracts have changed hands on open interest of fewer than 2,000 contracts, pointing to a barrage of new positions. Plus, 91% of the puts traded on the ask side, suggesting they were bought.

By purchasing the puts to open, the buyers expect Morgan Stanley to breach the $22.50 level by tomorrow's close, when March-dated options expire. More specifically, the puts crossed at a volume-weighted average price (VWAP) of $0.12, indicating a breakeven of $22.38 (strike price minus VWAP) for the buyers. Risk, meanwhile, is capped at the initial premium paid for the puts.

As alluded to earlier, the short-term option bears are likely gambling on a Fed-inspired dip for MS. At 4:30 p.m. Eastern, the regulators will unveil the next piece of their Comprehensive Capital Analysis and Review (CCAR) -- better known as the "stress tests" -- deciding by how much the top domestic banks can increase capital returns via share buybacks or dividend hikes.

Even before today, though, the options crowd was upping the bearish ante on MS. 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 stands at a one-year high of 1.54. Or, simply put, option buyers have picked up MS puts over calls at an annual-high clip during the past couple of weeks.

As a result, the equity's Schaeffer's put/call open interest ratio (SOIR) stands at 1.33 -- just 2 percentage points from its own 52-week acme. In other words, short-term options players have rarely been more put-heavy during the past year.

Fundamentally, Morgan Stanley and its fellow U.S. banks passed the last round of stress tests, the results of which were revealed a week ago. Separately, the Securities and Exchange Commission (SEC) last night granted the requests of MS and three other large-cap banks in blocking shareholder breakup proposals.

Technically, the shares of MS have added more than 18% in 2013, and have outperformed the broader S&P 500 Index (SPX) by nearly 15 percentage points during the past three months. More recently, the stock has taken a breather, consolidating gains atop its ascending 10-week moving average. Should the security resume its longer-term uptrend, a reversal in sentiment in the options pits could stoke the bullish flames.


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