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Community Health Systems Traders Prepare for More Pain

CYH skeptics are scooping up front-month puts

by 10/4/2012 2:47 PM
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Option bears are pouncing on Community Health Systems (NYSE:CYH - 29.34), which -- along with many hospital stocks -- has bucked the broad-market trend into the black. At last check, the security has seen nearly 1,800 puts change hands, representing 39 times its average intraday put volume. On the flip side, fewer than 150 CYH calls have traded so far.

Most popular has been the near-the-money October 29 put, which has seen more than 1,500 contracts cross the tape -- mostly at the ask price, suggesting they were bought. Considering this front-month strike harbors no puts outstanding, it's safe to assume that today's volume consists of newly initiated positions.

By purchasing the puts to open, the buyers are betting on CYH to extend today's retreat over the next couple of months. The volume-weighted average price (VWAP) of the puts is $2.04, meaning the buyers will profit if CYH sinks below the $26.96 level (strike minus VWAP) within the puts' lifetime. However, even if the security remains atop the $29 level, the investors' maximum risk is capped at the initial premium paid.

Even before today's drop -- which most analysts attribute to the Obamacare namesake's arguably lackluster performance in last night's debate -- options traders were upping the bearish ante on CYH. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day put/call volume ratio of 3.56, indicating that speculators have bought to open nearly four CYH puts for every call during the past couple of weeks. Plus, this ratio stands higher than 83% of all others of the last year, implying that investors are establishing pessimistic positions at an accelerated clip.

However, there's still plenty of room on the bearish bandwagon. Despite the growing appetite for puts, CYH's short-term calls still outnumber their put counterparts, as evidenced by the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.30. What's more, this ratio registers in the 14th percentile of its annual range, indicating that near-term options players have rarely been more call-heavy during the past 52 weeks.

In similar fashion, the security has earned six "strong buys" and one "buy" endorsement from analysts, compared to eight lukewarm "holds" and not a single "sell" or worse suggestion.

Technically speaking, the shares of CYH have muscled roughly 70% higher in 2012, touching an annual high of $30 earlier this week. The stock fell as low as $27.80 right out of the gate this morning, but has since pared its deficit to 1.8%, and is attempting to maintain a perch atop its 10-day moving average.

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