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Schnitzer Steel Speculators Gamble On Limited Downside

SCHN puts are picking up steam

by 8/29/2012 11:08 AM
Stocks quoted in this article:

The shares of Schnitzer Steel Industries, Inc. (NASDAQ:SCHN - 27.04) have extended yesterday's retreat, and are in danger of ending the week south of their 10-week moving average for the first time since late June. Nevertheless, it looks like some options speculators are employing puts to bet on limited downside for the commodity concern.

Within the first two hours of trading, SCHN has already seen more than 1,300 puts cross the tape -- about 16 times its expected intraday put volume. For comparison, fewer than 100 SCHN calls have changed hands thus far.

Among the most popular options is the January 2013 22-strike put, which has seen 200 contracts traded on open interest of just 31, pointing to newly initiated positions. However, all of the LEAPS have crossed at the bid price, pointing to sell-to-open activity. By writing the puts to open, the sellers are betting on the options to expire worthless, allowing them to retain the entire premium received. Or, simply put, the investors are expecting the shares of SCHN to remain north of $22 through January options expiration.

Broadening our sentiment scope, we find that most options traders have been employing more traditional measures to bet bullishly on SCHN. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security sports a 10-day call/put volume ratio of 5.09, indicating that investors have bought to open more than five SCHN calls for every put during the past two weeks. What's more, this ratio registers in the 69th percentile of its annual range, hinting at a healthier-than-usual appetite for long calls of late.

Nevertheless, SCHN's bullish bandwagon is far from crowded. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.10 sits in the 81st percentile of its annual range, suggesting short-term speculators are still more put-heavy than usual right now. Plus, short interest represents 11.5% of SCHN's total available float, and would take more than a week to unwind, at the equity's average daily trading volume.

In the same vein, the analyst community is decidedly bearish on the equity. Currently, SCHN boasts just one "buy" or better endorsement, compared to eight "hold" or worse recommendations. What's more, a session after the firm said it will cut 300 jobs to account for falling prices' impact on profits, SCHN was downgraded to "sell" from "outperform" at CLSA this morning.

Technically speaking, it's no surprise to find skepticism surrounding SCHN, considering the stock was trading in late-2008 territory just two months ago. However, the equity's long-term descent was halted in the $22 region, which could explain why the aforementioned investors are selling the 22-strike puts. As alluded to earlier, though, even if SCHN recovers some of its recent losses, the stock will have to contend with its 10-week trendline, as well as its 32-week moving average, which has served as resistance since mid-2011.

Weekly Chart of SCHN since April 2011 With 10-Week and 32-Week Moving Averages


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