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Put Volume Soars as DryShips Sinks

Puts have been the options of choice on underperforming DRYS

by 11/15/2012 12:33 PM
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On the heels of last night's quarterly earnings announcement, puts are flying off the shelves on DryShips Inc. (NASDAQ:DRYS - 1.77). More than 8,100 contracts have crossed the tape, representing nearly 30 times the average intraday volume for put options. As a point of comparison, fewer than 3,600 call contracts have changed hands.

Speculators are taking a long-term bearish outlook on the stock, and are scooping up DRYS' June 2-strike put. The healthy majority of the roughly 5,000 contracts traded have crossed at the ask price, implied volatility has ticked 1.5 percentage points higher, and only 67 contracts currently make up open interest at this strike. Summing it all up, it seems there is some buy-to-open activity happening here today. By initiating these long puts, traders expect DRYS to swoon beneath the $1.53 mark (the strike minus the volume-weighted average price of $0.47) by June expiration.

Expanding the scope, this penchant for DRYS puts is just par for the course among option players. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.40 ranks just six percentage points from a 52-week peak. In other words, speculators have bought to open puts over calls at a near annual-high pace during the past two weeks.

Additionally, DRYS' Schaeffer's put/call open interest ratio (SOIR) of 0.43 ranks in the 96th percentile of its annual range, implying short-term speculators have been more put-heavy only 4% of the time within the last year.

The pessimism aimed toward DRYS isn't too surprising, given the stock's withstanding technical and fundamental issues. Heading into today's session, shares of DRYS had already shed 24.4% on a year-over-year basis. However, after reporting a wider-than-anticipated third-quarter loss as a result of rising operating expenses, the stock has plunged an additional 14.4% today, tagging a record low of $1.74 in the process. This is the fourth time in as many quarters DRYS has missed analysts' estimates.

Heading into the latter half of the session, DRYS is hovering near the $1.77 mark. Should the stock fail to breach the aforementioned breakeven level by June, though, the put buyers can rest easy knowing the most they stand to lose is the initial premium paid.


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