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Pessimists Expect a Downturn for Applied Materials, Inc.

Bearish betting heats up on AMAT

by 4/4/2013 10:01 AM
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Applied Materials, Inc. (NASDAQ:AMAT) has seen a glut of bullish attention in the options pits lately, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the equity's 10-day call/put volume ratio checks in at 3.38, indicating calls bought to open have more than tripled puts during the past two weeks. This ratio resides in the 70th percentile of its annual range, reflecting a healthier-than-usual appetite for calls over puts.

However, yesterday's options activity was of the pessimistic variety. Nearly 9,000 puts crossed the tape during the course of the session -- about four times the norm, and almost triple the number of calls exchanged. The front-month series of options seemed to be in the spotlight, with speculators gambling on a decline for Applied Materials, Inc. over the next couple of weeks. Leading the pack was the April 13 put, where north of 8,100 contracts changed hands -- almost all of them at the ask price, pointing to buyer-fueled volume.

To be more specific, these near-the-money puts traded at a volume-weighted average price (VWAP) of $0.19. Meanwhile, this strike saw an overnight rise in open interest of almost 7,900 contracts, signaling the addition of fresh bearish bets. Essentially, traders are expecting AMAT to fall south of $12.81 (strike price less the VWAP) by the close on April 19, when these front-month options expire. This denotes a 2.6% decrease from yesterday's closing price of $13.15.

The delta for these puts is currently docked at negative 0.40, meaning they have a 40% chance of moving into the money ahead of April expiration. Also of note, AMAT's Schaeffer's Volatility Index (SVI) of 23% ranks higher than 19% of similar annual readings. In other words, even if the stock fails to retreat low enough to reward Wednesday's bulls, they can rest easy knowing their front-month put purchases were relatively cheap.

From a technical perspective, Applied Materials, Inc. has trekked roughly 15% higher in 2013, and has outshined the broader S&P 500 Index (SPX) on a relative-strength basis during the past three months. However, the security is currently hovering below its 40-day moving average, which has acted as a ceiling since mid-March.

At last check, AMAT is fractionally higher and trading in the $13.16 neighborhood.


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