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United Continental Option Trader Bets on a Nosedive

UAL put buying has ramped up in recent weeks

by 11/14/2012 8:59 AM
Stocks quoted in this article:

The shares of United Continental Holdings Inc (NYSE:UAL - 20.94) have muscled nearly 20% higher since skimming the $17.50 level in mid-August, but continue to run into a wall around their 200-day moving average. Against this backdrop, option traders have been upping the bearish ante in recent weeks, and it looks like one speculator is gambling on some serious downside in the long term.

During the past two weeks, traders have bought to open more than three UAL puts for every call on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). What's more, the security's 10-day put/call volume ratio of 3.10 sits just two percentage points shy of a 52-week peak, suggesting option buyers are initiating pessimistic positions at a near annual-high clip.

As such, the airline issue sports a Schaeffer's put/call open interest ratio (SOIR) of 1.64, indicating that puts outnumber calls among options with a shelf-life of three months or less. Furthermore, this ratio ranks in the 97th percentile of its annual range, implying that near-term options players have rarely been more put-heavy on UAL during the past year.

However, the bears are also scooping up long-term options to bet on a fall from grace for UAL, as evidenced by yesterday's activity in the options pits. During the course of the session, UAL saw roughly 11,000 puts change hands -- more than double its average daily put volume, and more than three times the number of calls traded. Most active was the January 2015 13-strike put, which saw a block of 7,450 contracts trade at the ask price of $2.15 apiece. Put open interest at the LEAPS strike skyrocketed overnight, confirming our theory of buy-to-open activity.

By purchasing the puts to open, the buyers are expecting UAL to plummet beneath the $13 level within the next couple of years. Specifically, the traders will make money if UAL breaches the $10.85 level (strike minus premium paid) by January 2015 options expiration. Or, in other words, the put buyers are betting on UAL to drop nearly 50% from current levels.

Daily Chart of UAL since July 2012 With 200-Day Moving Average


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