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Option Traders Think VeriFone Systems Inc Will Bounce Back

PAY's May 22 call was bought to open on Thursday

by 4/5/2013 10:52 AM
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Although VeriFone Systems Inc (NYSE:PAY) has chalked up a steep 30% year-to-date deficit, calls continue to be the options of choice among option traders. In yesterday's session alone, around 15,000 calls changed hands, more than double the average daily volume. By comparison, roughly 1,000 puts were exchanged. The stock's May 22 call was of particular interest, where 3,343 contracts changed hands for a volume-weighted average price (VWAP) of $1.04. The majority of these contracts crossed at the ask price, and open interest rose overnight, pointing to the initiation of new bullish positions.

By purchasing the out-of-the-money calls, traders expect VeriFone Systems to rise above the $22 mark by the close on Friday, May 17, when back-month options expire. More specifically, the speculators will profit with each step above breakeven at $23.04 (strike price plus the VWAP) the stock takes over the next six weeks. Delta for the call is currently docked at 0.40, or 40%, meaning the options market is giving the position a 2-in-5 chance of expiring in profitable territory. Should PAY fail to topple the strike price, the most the traders stand to lose is the initial premium paid. With implied volatility at this strike deflated relative to the stock's 40-day historical (realized) volatility (55% vs. 142.8%), the call buyers can rest easy knowing the premium they paid was rather inexpensive.

As touched upon, though, Thursday's campaign for calls only highlights the withstanding trend in the options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open more than 27 calls for every put during the past 10 sessions. The resultant call/put volume ratio of 27.33 ranks higher than all other readings taken in the past year, suggesting bullish bets have been placed over bearish at an annual-high clip in recent weeks.

As such, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.27 ranks in the lowest percentile reading of its annual range. In other words, short-term speculators are more call-heavy now than at any other time within the last year.

This overriding bullish sentiment among option players is a bit surprising given VeriFone Systems' aforementioned loss in 2013. Additionally, PAY has underperformed the broader S&P 500 Index (SPX) by more than 37 percentage points throughout the past 60 sessions. The downward trajectory is continuing in today's session, with the stock trading around 0.7% lower at last check.

Fundamentally, VeriFone Systems Inc (NYSE:PAY) is being investigated by New York-based Harwood Feffer LLP regarding allegations that the board fell short of its fiduciary responsibilities to shareholders.


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