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Pandora Media Inc (P) Option Players Descend as Stock Plummets

Put trading is three times what's expected

by 6/3/2013 1:46 PM
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Options speculation has taken an interesting turn in Pandora Media Inc (NYSE:P) today. The stock has spiraled dramatically lower -- off 12.2% currently at $14.95 -- after rumors surfaced that Apple Inc. (NASDAQ:AAPL) could soon be launching its own streaming music service. This sharp drop placed Pandora shares on the short-sale-restricted list, spurring option bears into action.

Roughly 11,000 put contracts have changed hands in P today, more than tripling what is seen on a typical trading day. But what's most interesting about this trend is that some of this volume is skewed toward the bullish side. It looks as though a hopeful trader sold to open 1,000 June 13 puts near the bid price at $0.17 each, while buying to open the same amount of June 12 puts near the ask price at $0.09 each. The net credit for this bull put spread, therefore, is $0.08 per pair of contracts.

This short-term bet will reach its maximum profit of $0.08 (the credit collected) if P is still trading at or above $13 when these puts expire on June 21. Below the breakeven price of $12.92 (the short strike less the debit paid), losses begin to appreciate until the 12 strike, where they are maximized at $0.92 per spread, or the difference in strike prices less the credit. The breakeven zone is more than 13% south of the stock's current price (even after today's drubbing).

On the charts, P is testing its 40-day moving average today. This trendline has served as support since December, containing a number of recent pullbacks. Meanwhile, prior to today's move, P had outperformed the broader S&P 500 Index (SPX) by more than 37 percentage points during the last three months.

Daily chart of Pandora Media (P) since November 2012

Time will tell if today's move forces the hand of options players, who had recently been buying up P calls. Pandora Media Inc's 50-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 2.85. In other words, calls are being scooped up at nearly triple the rate of puts. This ratio is also higher than 82% of the past year's similar readings, suggesting bullish speculation has been notably popular over the last 10 weeks.


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