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Bullish Brokerage Notes Boost Zions Bancorporation's Call Volume

One neutral trader constructed a long strangle on ZION

by 3/12/2012 11:31 AM
Stocks quoted in this article:

Zions Bancorporation (ZION - 18.70) received some bullish analyst attention on Thursday, as the equity was started at "buy" at Roth Capital, and raised to "overweight" from "neutral" at J.P. Morgan. This may have sparked an influx of call activity on Friday, as nearly 8,800 of these options were exchanged, which was six times above the norm. More than 7,000 calls were traded at the near-the-money March 19 strike -- which saw a rise in open interest of 6,672 contracts over the weekend, signaling the initiation of new positions. This option now holds peak call open interest of 8,983 contracts.

Digging deeper into the data, it appears that a block of 5,850 puts was bought at the March 18 strike, while an equal number of calls were simultaneously purchased at the aforementioned March 19 strike. This strategy -- known as a long strangle -- is often employed when a trader is expecting a big swing in stock price, but isn't quite sure which direction it will move. If the stock rises, his potential reward is, theoretically, unlimited. However, he can also benefit if the stock declines, in which case his profit is limited to $17.55 (put strike minus net debit of $0.45). On the other hand, if the stock closes between the two strikes by front-month expiration this Friday, his maximum risk is capped at the net debit paid.

From a broader sentiment scope, Friday's call activity runs counter to ZION's current trend. The Schaeffer's put/call open interest ratio (SOIR) rests at 1.02, confirming that puts slightly outnumber calls among options expiring within three months. This ratio ranks in the 91st percentile of its annual range, conveying that near-term options players have been more bearishly aligned toward the stock just 9% of the time over the past year.

What's more, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day put/call volume ratio of 1.24 for the banking concern, indicating that puts bought to open have comfortably outnumbered calls during the last two weeks. This ratio registers in the 70th annual percentile, which means that traders have been scooping up bearish bets over bullish at an accelerated clip.

Technically speaking, ZION has added around 15% year-to-date, and has outpaced the broader S&P 500 Index (SPX) by almost 13% during the past 60 sessions. On the charts, the stock is clinging to its 10-week moving average, which has served as support since late December.

At last look, the equity is down by 1.5% and is trading at $18.70.


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