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Norfolk Southern Put Volume Pops

NSC's plunge has prompted a run on short-term puts

by 9/20/2012 11:42 AM
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Option bears are pummeling Norfolk Southern Corp. (NYSE:NSC - 66.22) today, with puts flying off the shelves at a rapid-fire rate. Around midday, the railroad concern has already seen roughly 15,000 puts change hands -- about 54 times its average intraday put volume. Meanwhile, just over 4,100 NSC calls have traded thus far.

Most active has been the now in-the-money September 67.50 put, which has seen nearly 7,700 contracts cross the tape on open interest of just 1,623, pointing to an influx of fresh eleventh-hour bets. What's more, 85% of the soon-to-expire puts traded at the ask price, hinting at buyer-driven volume.

By purchasing the puts to open, the buyers are expecting NSC to extend today's retreat through tomorrow's close, when September-dated options expire. More specifically, the volume-weighted average price of the puts is $0.50, meaning the traders will profit as long as NSC remains south of the $67 level (strike minus premium paid).

Meanwhile, a less aggressive option bear turned to the soon-to-be front-month October series to establish a long put spread on NSC. Digging deeper, the investor bought a block of October 65 puts for the ask price of $0.79 each, and simultaneously sold an equal amount of October 60 puts for $0.14, resulting in a net debit of $0.65 per pair of contracts.

By writing the lower-strike puts, the investor trimmed both his breakeven rail -- which now stands at $64.35 (bought put strike minus net debit) -- and net debit, which represents the maximum loss on the trade. However, he also capped his profit potential at $4.35 (difference between strikes minus net debit), no matter how far NSC should sink south of $60.

Even before today's plunge, the options crowd was growing wary of NSC. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day put/call volume ratio of 1.51 stands higher than 73% of all other readings of the past year. Or, simply put, option buyers were initiating bearish bets over bullish at a quicker-than-usual clip during the past two weeks.

Furthermore, short sellers are undoubtedly cheering today's drop-off. These pessimistic positions increased by 3.8% during the most recent reporting period, and would take nearly a week to repurchase, at NSC's average daily trading volume.

On the other hand, a few analysts could be reconsidering their positions on NSC. Before today's drop, the stock boasted 13 "strong buys" and one "buy" rating, compared to 10 lukewarm "holds" and just one "sell" or worse recommendation. Likewise, the average 12-month price target on the equity stands at $83.78, representing a premium of 27% to NSC's intraday nadir of $66.03.

As alluded to several times over, the shares of NSC are swimming in red ink today, after the firm forecast third-quarter earnings below expectations. At last check, the stock has surrendered 8.9% to linger in the $66.22 region, and was already hit with a downgrade to "market perform" from "outperform" at Wells Fargo, as well as a price-target cut to $77 from $87 at Baird. Should more bulls abandon ship, additional downgrades and/or price-target reductions could exacerbate NSC's decline.

Here are some additional articles of interest:

Two More Reasons to Stay Bullish

3 Stocks at All Time Highs That Get No Respect


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