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DryShips Skeptics Expect a Continued Slide

Put buyers scooped up DRYS' July 2 contract

by 6/1/2012 9:25 AM
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The shares of DryShips Inc. (DRYS - 2.21) retreated in tandem with the broader equities market yesterday, snapping their short-lived run north of their 10-day moving average. What's more, it looks like a slew of options traders are betting on the stock to explore year-to-date lows in the near future.

During the course of yesterday's session, DRYS saw more than 7,300 puts cross the tape -- about four times its average daily volume, and more than double the number of DRYS calls exchanged. Most of the action centered on the July 2 put, which saw more than 4,600 contracts change hands. Ninety-five percent of the puts traded at the ask price, and put open interest at the back-month strike skyrocketed by almost 4,300 contracts overnight, pointing to buy-to-open activity. By purchasing the puts to open, the buyers are expecting DRYS to breach $2 within the next couple of months.

However, yesterday's bearish betting is just a drop in the bucket for DRYS. On 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 0.50 stands just one percentage point from a 52-week peak. In other words, options traders have bought to open DRYS puts over calls at a near annual-high clip during the past couple of weeks -- likely in preparation for the company's earnings release, which hit the Street late Tuesday.

Speaking of DRYS' earnings, the firm confessed to a wider-than-anticipated first-quarter loss, but managed to finish the following session in the black. As alluded to earlier, however, the shares surrendered their foothold atop their 10-day trendline yesterday, thanks to broad-market headwinds and a bearish brokerage note. Specifically, Jefferies cut its price target on the equity to $2.50 from $3, and reiterated its "hold" rating. There's still a surprising amount of optimism surrounding DRYS, though, considering the stock's 52-week deficit of 42.3%. Currently, three out of seven analysts maintain "strong buy" opinions.

Daily chart of DRYS since April 2012


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