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Estee Lauder Bears Eye Potential Resistance

Speculators zero in on EL's short-term puts

by 8/31/2012 12:28 PM
Stocks quoted in this article:

Beauty products diva Estee Lauder Companies Inc (NYSE:EL - 59.90) has been hit with a barrage of bearish options activity today, as more than 7,000 puts have crossed the tape -- more than eight times the norm, and nearly 30 times the number of calls traded.

The front-runner has been the October 65 strike, where more than 5,200 calls have changed hands -- more than half of them at the ask price, implying they were purchased. Traders paid a volume-weighted average price (VWAP) of $5.39 per contract for these in-the-money puts. Meanwhile, this option is currently home to open interest of just 113 puts, making it safe to say that new positions are being added here today. By buying these puts to open, speculators are counting on the stock to close below $59.61 (strike price minus premium paid) by back-month expiration.

However, EL has been the target of bearish speculation well before today. The Schaeffer's put/call open interest ratio (SOIR) checks in at 2.09, signaling that puts more than double calls among options slated to expire in the next three months. In fact, this ratio is just two percentage points shy of an annual peak, meaning near-term traders have rarely been more put-heavy toward the stock. Likewise, EL's 20-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio sits at 1.77. In other words, puts bought to open have outnumbered calls over the past four weeks.

The brokerage bunch seems to have more confidence in EL, which sports nine "strong buys" and one "buy" endorsement, compared to six "holds" and not a single "sell" suggestion to be found. What's more, Thomson Reuters shows an average 12-month price target of $65.13 for the security -- reflecting expected upside of almost 9% to Thursday's closing price of $59.81.

The shares of EL have done well on the technical front, tacking on nearly 22% on a year-over-year basis, and outperforming the broader S&P 500 Index (SPX) by about 12 percentage points during the last 20 sessions. A look at the charts shows that the stock continues to trade well above its 200-day moving average, which it surmounted after an earnings-induced bullish gap on Aug. 14. However, EL's April rally attempt fizzled out near the $65 level, so today's October 65 put buyers may be expecting this area to hold firm as resistance during the near term.


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