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Option Idea of the Week: Cardinal Health

CAH could backpedal in the face of former support

by 9/27/2012 12:27 PM
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The shares of Cardinal Health, Inc. (NYSE:CAH - 39.04) are still struggling to recover from their earnings-induced drop in early August, after the company offered a weaker-than-expected fiscal-year forecast. What's more, while the stock has gained a bit of ground this week, it's heading towards multi-layered resistance. The security's technical trajectory, juxtaposed against a bullish sentiment backdrop, could spell opportunity for contrarian bears.

On the charts, CAH has underperformed the broader S&P 500 Index (SPX) by 12 percentage points during the past 60 sessions. As alluded to earlier, the equity has tacked on roughly 1.1% so far this week, but is now facing its once-supportive 80-month moving average, which is lingering in the $40 neighborhood. This round-number region acted as a technical foothold for CAH through 2011 and most of 2012, but could now switch roles to serve as resistance. Above that, the security's 20-month moving average is lingering in the $42 area. This trendline contained CAH's pullback a couple of years ago, but could now emerge as another speed bump on the charts.

Monthly Chart of CAH since September 2009 With 20-Month and 80-Month Moving Averages

Despite the stock's headwinds of late, Wall Street remains enamored of CAH. In fact, the security sports eight "strong buys" and two "buy" endorsements from analysts, compared to two lukewarm "holds" and not one "sell" or worse rating. Plus, the consensus 12-month price target on the equity stands at a lofty $46.81 -- representing a premium of 20% to CAH's closing price of $38.94 on Wednesday, and in territory the stock hasn't explored since July 2011.

In the same vein, option players have been flocking to the bullish camp. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day call/put volume ratio of 4.72. Furthermore, this ratio registers in the 69th percentile of its annual range, suggesting option buyers have picked up CAH calls over puts at a faster pace than usual during the past couple of weeks.

As a result, the security's Schaeffer's put/call open interest ratio (SOIR) rests at 0.37, indicating that calls more than double puts among options expiring within three months. Compared to similar readings of the past year, this ratio sits in the 20th percentile, implying that short-term options players are much more call-biased than usual right now.

Should the shares of CAH backpedal in the face of overhead resistance, an unwinding of optimism in the options pits, or a round of downbeat analyst attention, could exacerbate the stock's challenges on the charts.

Investors expecting CAH to stage a retreat should consider buying the stock's in-the-money January 2013 44-strike put, which was last offered for $5.70.

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