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Marriott Option Bulls Emerge Ahead of Earnings

MAR optimists are buying at-the-money calls

by 10/3/2012 11:48 AM
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Options traders have set their sights on Marriott International, Inc. (NYSE:MAR - 38.85) today, especially on the call side of the aisle. At last look, the hotelier has already seen more than 4,500 calls cross the tape -- about 15 times its average intraday call volume, and about 32% higher than the number of MAR puts traded.

Nearly all of the action has centered on the at-the-money October 38 call, which has seen close to 3,300 contracts change hands. The majority of the calls have crossed at the ask price, and intraday volume has exceeded open interest at the front-month strike, pointing to buy-to-open activity.

By purchasing the calls to open, the buyers are likely betting on a post-earnings boost for MAR, which steps into the earnings confessional after the close. More specifically, the volume-weighted average price (VWAP) of the calls is $1.74, indicating a breakeven level of $39.75 (strike plus VWAP). However, should MAR fail to topple this marker by October options expiration, the buyers' maximum risk is limited to the initial premium paid.

And thanks to pre-earnings demand for MAR's near-term options, those call buyers paid a relatively pretty penny to wax optimistic on the stock. The shares' Schaeffer's Volatility Index (SVI) has been on the rise during the past couple of weeks, and now stands at 34% -- higher than 38% of all other readings of the past year.

However, today's appetite for bullish bets marks a change of pace in the options arena. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have scooped up nearly six MAR puts for every call during the past two weeks. In fact, the equity's 10-day put/call volume ratio of 5.70 sits in the 89th percentile of its annual range, implying that option buyers have initiated pessimistic positions at a faster-than-usual pace.

Echoing that trend, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.51 tells us that puts outnumber calls among options with a shelf life of less than three months. What's more, this ratio stands higher than 70% of all other readings of the past year, indicating that near-term traders are more put-biased than usual right now.

Meanwhile, that skepticism isn't limited to the options pits. Despite depleting by 12.3% during the past month, short interest still accounts for a healthy 7.6% of MAR's total available float. At the stock's average daily trading volume, it would take nearly seven sessions to repurchase all of these pessimistic positions. Elsewhere, the average 12-month price target among analysts sits at $41.61, implying expected upside of just 7.7% to MAR's closing price of $38.63 on Tuesday.

Fundamentally, Marriot has matched or exceeded Wall Street's bottom-line earnings estimates in three of the past four quarters, according to Thomson Reuters. However, the collective opinion ahead of this afternoon's report appears to be skeptical, with many analysts anticipating softness in international markets to weigh on third-quarter results.

On the charts, the shares of MAR have added more than 32% in 2012, and touched a near five-year peak of $41.84 in mid-September. Since then, the stock has pulled back to test the support of its 10-week moving average, which is currently lingering in the $38.65 neighborhood. Should MAR exceed earnings expectations tonight, an unwinding of pessimism in the options pits, a short-squeeze situation, or a wave of upbeat analyst attention could help the security resume its longer-term uptrend.

Marriott International (MAR) Schaeffer's Volatility Index

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