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Bearish Xerox Traders Stay in the Game

Put buyers roll positions up and out

by 7/3/2012 12:15 PM
Stocks quoted in this article:

Xerox Corporation (NYSE:XRX - 7.96) is officially unchanged in 2012 today, thanks to a modest move higher. The stock may have enjoyed this lift on Xerox's announced plans to acquire Lateral Data for $30 million, in an effort to beef up the IT giant's litigation-services division. In the past 52 weeks, however, XRX has lost more than 25%, and option players are expecting this pullback to continue. In fact, put volume is currently running roughly 13 times ahead of the normal pace.

Put traders, who may have bought July 8-strike puts as long ago as December (when open interest grew by 12,000 contracts in a single session), are selling out of these puts at $0.26 per contract and rolling them to a later date and higher strike. The January 2013 9-strike put has seen 3,500 contracts trade today on open interest of 685. These puts are going off at the ask price of $1.45, further confirming buyers are holding the reins.

This long put looks for XRX shares to be trading south of $7.55 (the strike less the premium paid) when the January options expire. Below this threshold, gains begin to build. If XRX is trading north of the 9 strike at expiration, the put buyer risks only the premium paid.

Today's action bucks the recent trend in XRX option pits, which has been tilted toward the call side. In the past 10 trading days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the call/put volume ratio stands at 17.49. In other words, for every put that has been bought to open, almost 17.5 new calls have changed hands. This volume ratio is higher than 80% of the past year's worth of readings.

Technically speaking, XRX is staring down its 40-week moving average, which is currently perched at $7.94 (two pennies below the stock's current level). The stock has not managed a clean break above this trendline since early April 2011, so a confident surge above this moving average -- followed by a weekly close on the north side of this trendline -- could be a strong technical development that could spell discouraging short-term news for today's bears.


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