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Zillow Bears Converge as Stock Tumbles

A bearish note from Citron Research has Z wallowing in the red

by 9/25/2012 2:50 PM
Stocks quoted in this article:

Online real estate concern Zillow Inc's (NASDAQ:Z - 42.13) dismal price action in today's session has caught the attention of option traders. Activity is accelerated on both sides of the aisle, but puts are five times more popular than calls.

Short-term bears are paying particular attention to the October 35- and 40-strike puts, which have seen a respective 4,000 and 7,300 contracts cross the tape. The majority of puts at each strike have traded at the ask price, and volume is outstripping open interest, allowing us to assume new pessimistic positions are being initiated.

By buying the October 35-strike put to open for a volume-weighted average price (VWAP) of $0.91, traders expect Z to fall below $34.09 (the strike minus the VWAP), or 23.6%, over the next four weeks. Meanwhile, the 40-strike put players will profit with each step south of $37.83 (the strike minus the VWAP of $2.17) the stock takes through November expiration. This represents an 11.3% slide from the equity's current perch.

Widening the sentiment scope, option players' preference for bearish bets has been growing in recent weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the stock's 20-day put/call volume ratio of 5.01 more than doubles its 50-day put/call volume ratio of 2.34. Additionally, Z's Schaeffer's put/call open interest ratio (SOIR) of 1.45 ranks in the 86th percentile of its annual range, indicating short-term speculators have been more put-heavy just 14% of the time within the past year.

This pessimism is mirrored outside of the options pits, as well. Short sellers increased their bearish exposure by 9.1% over the last two reporting periods, and short interest now accounts for a staggering 38.8% of the stock's float. It would take nearly 10 sessions to cover these shorted shares, at Z's average daily pace of trading.

Ahead of today's session, Z's technical backdrop was nothing to scoff at. The shares had nearly doubled in value on a year-to-date basis. Plus, the equity hit an annual peak of $46.86 last Thursday. However, today's bearish tidings from Citron Research, in which the short seller called Zillow's business tactics "ridiculous," has Z down more than 5% at last check.

To the dismay of the aforementioned put players, today's plunge was caught by Z's 32-day moving average. This trendline has proved supportive for the stock since late August, and could continue to do so in the short term. Should Z fail to breach either breakeven mentioned above, though, the most the traders have to lose is the initial premium paid.

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