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A Possible Bid Block by the FTC May be Boosting Omnicare's Put Volume

Also, one trader employs a bear put spread on OCR

by 1/13/2012 11:03 AM
Stocks quoted in this article:

Put volume spiked on drug retailer Omnicare (OCR - 33.16) yesterday, after the New York Post reported that the Federal Trade Commission (FTC) will likely veto the company's bid to buy rival PharMerica Corporation (PMC). A formal decision is expected by the end of next week, the newspaper said. As such, roughly 18,000 puts changed hands, which was eight times above the norm. Most of the action centered on the near-the-money February 33 strike, where nearly 6,900 of these options crossed the tape -- the majority of them at the bid price, suggesting they were sold. Open interest on this put fell by almost 700 contracts overnight, pointing to liquidation activity. However, the strike still holds peak back-month put open interest of 11,030 contracts.

Digging deeper into the data, it appears that a block of 500 puts was exchanged near the bid price on the February 28 strike, signaling it was sold, while another block of 500 puts was traded at the ask price on the February 33 strike, indicating it was bought. This activity implies the initiation of a bear put spread. In this strategy, the speculator is betting that the stock will finish at or below $28 by the time back-month options expire. In the best-case scenario, the profit is limited to $3.60, or the difference between the strike prices, minus the net debit of $1.40. Meanwhile, the trader's maximum risk is capped at the initial premium paid.

This preference for puts over calls is business as usual for OCR. The Schaeffer's put/call open interest ratio (SOIR) rests at 1.20, confirming that puts outnumber calls among options slated to expire within three months. In fact, this ratio is just seven percentage points shy of an annual peak, meaning that short-term options players have rarely been more put-heavy toward the stock over the past year.

What's more, OCR's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio sits at 18.04, conveying that puts bought to open have outnumbered calls by more than 18 to one during the past two weeks. This ratio registers in the 78th percentile of its annual range, conveying that traders are buying bearish options over bullish at a faster-than-usual pace.

Technically speaking, the equity has lost nearly 4% of its value year-to-date, but has outpaced the broader S&P 500 Index (SPX) by over 9% during the past 40 sessions. On the charts, OCR is hovering just above its 10-week moving average, which has provided steady support since late October. At last check, the stock is up about 0.8% and is trading at $33.16.


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