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O'Reilly Automotive Bears Expect Immediate Downside

Front-month put activity picks up steam on ORLY

by 9/19/2012 2:31 PM
Stocks quoted in this article:

Bearish traders have pounced on O'Reilly Automotive Inc (NASDAQ:ORLY - 83.35) today, as north of 4,700 puts have been traded so far -- more than triple the security's anticipated intraday volume. On the other side of the options aisle, just over a 1,100 calls have changed hands.

The front-runner has been the September 80 strike, where nearly 3,100 puts have crossed the tape. The majority of these bearish bets were exchanged at the ask price, implying they were purchased. Traders paid a volume-weighted average price (VWAP) of $0.18 for these out-of-the-money contracts. This strike currently carries open interest of just 1,980 puts, signaling the addition of new positions. In order for speculators to realize a profit on this strategy, the stock must breach the breakeven rail of $79.82 (strike price minus VWAP) by front-month expiration this Friday.

However, ORLY puts have been ruling the options pits well before today. In fact, the equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio checks in at 21.10, confirming that traders have bought to open more than 21 puts for every call during the past two weeks. This ratio is just two percentage points away from a bearish peak, signaling that speculators have rarely picked up puts over calls at a faster pace.

In a similarly pessimistic vein, the Schaeffer's put/call open interest ratio (SOIR) for ORLY stands at 1.51, indicating that puts comfortably outpace calls among options with a shelf life of three months or less. This ratio arrives in the 95th percentile of its annual range, conveying that short-term traders have been more put-heavy toward the security just 5% of the time during the past year.

Despite this rampant pessimism among speculators, the brokerage bunch harbors much loftier expectations for the auto parts retailer. ORLY sports nine "strong buys" and two "buy" recommendations, compared to seven "holds" and not a single "sell" recommendation. Even more telling, the equity's average 12-month price target rests at $98.78, representing a premium of close to 19% from its current perch.

From a technical standpoint, ORLY has trekked 15% higher over the past 12 months, but has lagged the broader S&P 500 Index (SPX) by north of 23 percentage points during the last 60 sessions. What's more, the stock continues to trade below its 10-week moving average, which has acted as resistance since mid-May.

It's possible that today's ORLY bears were spooked by reports of slowing sales from rival AutoZone, Inc. (NYSE:AZO), which initially dragged both stocks lower. However, both equities have since made up ground, and ORLY shares are trading 2.7% higher at last check. In other words, the stock will have to fall more than 4.4% by expiration this Friday in order for these front-month skeptics to claim a profit.

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