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Put Volume Soars on Barnes & Noble, Despite Microsoft Investment

Bears flock toward BKS' front-month puts

by 4/30/2012 12:33 PM
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Shares of Barnes & Noble (BKS - 23.20) are skyrocketing today, amid investment news from Microsoft (MSFT). However, this rally has hardly kept the bears at bay, as roughly 15,000 puts have changed hands so far, reflecting 10 times the equity's expected intraday volume. Most active has been the near-the-money May 22 strike, where 4,040 puts have been traded -- the majority of them at the ask price, pointing to buyer-driven activity. Currently, this option holds open interest of just 67 contracts, signaling an influx of new positions. In order for investors to collect a profit from these bought-to-open puts, the stock must fall below $22 by front-month expiration.

This rise in put volume runs counter to BKS' current trend. The 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio sits at 17.07, conveying that calls bought to open have outnumbered puts by more than 17 to one during the past 10 sessions. In fact, this ratio ranks in the 96th annual percentile, indicating that traders have been snapping up bullish bets over bearish at an almost annual-high clip.

However, BKS is certainly no stranger to attention from skeptics. Short interest on the bookseller jumped by more than 8% during the most recent reporting period, and now makes up a whopping 75% of the equity's float. This could mean that some of the aforementioned buy-to-open call volume is the result of hedging activity by short sellers. Either way, it would take nearly two weeks to cover these shorted shares, at the stock's average daily volume.

Technically, BKS has added about 59% so far this year. Thanks to today's surge, the stock hit a new high of $26 -- an area that hasn't been touched since August 2009. At midday, the equity is up nearly 70% to trade at $23.20. Prior to today's bullish gap, BKS hadn't traded above $22 in nearly two years -- so shareholders could be purchasing puts at this strike to lock in some of those paper profits.


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