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Pandora Media (P) Bears Buy Short-Term Put Options

P pessimists picked up front-month puts

by 2/6/2013 9:02 AM
Stocks quoted in this article:

The shares of Pandora Media Inc (NYSE:P - 11.36) sat out the broad-market rally yesterday, finishing south of their 10-day trendline for just the third time in nearly two months. What's more, option traders anticipate even more downside for the satellite radio concern, as evidenced by yesterday's appetite for short-term puts.

By the time the dust settled, P had seen roughly 10,000 puts cross the tape -- about three times its average daily volume. For comparison, fewer than 2,900 P calls were exchanged.

Most popular was the February 11 put, which saw more than 4,400 contracts change hands at a volume-weighted average price (VWAP) of $0.30. Most of the puts crossed on the ask side of the tape, and open interest at the front-month strike rose overnight, pointing to buy-to-open activity.

By purchasing the puts to open, the buyers will make money if P breaches the $10.70 level (strike minus VWAP) by the closing bell on Friday, Feb. 15, when the options expire. Currently, the puts' delta stands at negative 35, implying a 35% chance the contracts finish in the money. However, even if P remains north of $11, the buyers' maximum risk is the initial premium paid for the puts -- which was relatively cheap, as the equity's Schaeffer's Volatility Index (SVI) stands higher than just 13% of all other readings of the past year. Or, in simpler terms, P's front-month options are inexpensive, comparatively speaking.

From a sentiment standpoint, yesterday's preference for short-term puts runs counter to the trend. The stock's Schaeffer's put/call open interest ratio (SOIR) currently rests at 0.50, indicating that calls are twice as popular as puts among options expiring within three months. Furthermore, this ratio registers in the 34th percentile of its annual range, implying that near-term options players are more call-heavy than usual right now.

On the charts, P has powered more than 23% higher in 2013. However, the shares are struggling to surmount the $11.50-$12 region, which marks the site of P's bearish gap in March 2012, and has emerged as a technical speed bump ever since.


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