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Option Traders Forecast More Downside for Tenet Healthcare

THC's pullback lured a batch of fresh put buyers

by 10/5/2012 10:16 AM
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Put players took a shine to Tenet Healthcare Corporation (NYSE:THC - 6.30) yesterday, with traders gambling on an extended pullback for the hospital stock. By the time the dust settled, THC had seen more than 1,600 puts change hands -- about 44 times its average daily volume.

Most active was the near-the-money October 6 put, which accounted for nearly 1,400 of the contracts exchanged. More than three-quarters of the puts crossed the tape at the ask price, and put open interest at the front-month strike ballooned overnight, underscoring our theory of buy-to-open activity.

By purchasing the puts to open, the buyers are expecting THC to breach the $6 level -- which hasn't happened on a daily closing basis since Sept. 17 -- within the next couple of weeks. More specifically, the volume-weighted average price (VWAP) of the puts was $0.18, meaning the buyers will profit if THC falls beneath the $5.82 level (strike minus VWAP) within the options' lifetime.

However, yesterday's appetite for puts was just more of the same for THC. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day put/call volume ratio of 0.59 -- which stands just six percentage points from a 52-week peak. In other words, option buyers have bought to open THC puts over calls at a near annual-high clip during the past two weeks.

Elsewhere on Wall Street, just four analysts have doled out "buy" or better ratings, with 11 others offering up tepid "hold" suggestions. Meanwhile, the average 12-month price target on the equity sits at $6.03, representing a discount to THC's closing price of $6.28 on Thursday.

In early trading, THC has erased yesterday's sector-wide, Obama-related dip, tacking on 0.3% to wink at the $6.30 level. However, the stock is struggling to overtake its 10-day moving average, which was breached for the first time since late August yesterday. In fact, this trendline ushered THC to fresh annual highs, with the security topping out at $6.74 on Monday. Nevertheless, should THC resume its longer-term uptrend, an unwinding of pessimism on Wall Street could work to the equity's advantage.

Daily Chart of THC since July 2012 With 10-Day Moving Average

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