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Applied Materials Traders Expect a Breach of Support

AMAT is attracting short-term option bears

by 10/5/2012 2:47 PM
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The shares of Applied Materials, Inc. (NASDAQ:AMAT - 11.19) are following the broader equities market into the black, with the stock attempting to climb back atop its 10-day moving average for the first time since Sept. 17. However, the options crowd is betting on the tech concern to resume its recent downtrend, as evidenced by today's appetite for puts.

In afternoon trading, AMAT has seen more than 3,700 puts cross the tape -- more than four times its average intraday put volume, and more than three times the number of AMAT calls exchanged. Most popular has been the November 11 put, which has seen close to 1,000 contracts change hands on open interest of just 705, pointing to newly initiated positions. Plus, 95% of the puts have traded at the ask price, suggesting they were bought.

By purchasing the puts to open, the buyers are expecting AMAT to breach the $11 level -- which has emerged as support during the past couple of weeks -- within the next few weeks. Specifically, the volume-weighted average price (VWAP) of the puts is $0.30, meaning the buyers will reap a reward if AMAT tumbles beneath the $10.70 level (strike minus VWAP) within the options' lifetime.

Broadening our sentiment scope, we find that today's affinity for puts merely echoes the growing trend. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 0.78 registers in the 82nd percentile of its annual range. Or, in simpler terms, option buyers have scooped up AMAT puts over calls at a faster-than-usual clip in recent months.

Nevertheless, the bearish bandwagon is far from crowded. In fact, the security's Schaeffer's put/call open interest ratio (SOIR) rests at 0.36, indicating that calls more than triple puts among options expiring within three months. What's more, this ratio stands just eight percentage points shy of an annual nadir, implying that short-term traders have rarely been more call-skewed during the past year.

Digging deeper, the overhead October 12 and 13 strikes are heavily populated, with call open interest of about 12,300 and 13,400 contracts, respectively. In the short term, this abundance of bullish bets overhead could translate into an options-related speed bump for AMAT.

As alluded to earlier, the shares of AMAT are enjoying broad-market tailwinds, and are trying to reclaim a perch atop their 10-day trendline. However, just overhead lies the equity's 200-day moving average, which is stagnating in the $11.50 area. This trendline has played the part of both support and resistance in 2012, and could stifle any upward momentum.

Daily Chart of AMAT since January 2012 With 10-Day and 200-Day Moving Averages

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