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AT&T Option Players Pick Up Post-Earnings Puts

T's put players are placing their short-term and long-term bets in today's session

by 10/24/2012 2:12 PM
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Option volume is heavy on AT&T Inc. (NYSE:T - 34.85) today, after the Dow component unveiled its quarterly results early this morning. Both puts and calls are trading at around two times the expected intraday volume. By the numbers, approximately 36,000 contracts have crossed the tape on each side of the options aisle.

Today's put players have honed in on the out-of-the money weekly 33.50 strike, as well as the longer-dated, deeper-out-of-the-money July 2013 31 strike. The majority of the nearly 2,000 contracts traded at the weekly strike have crossed at the ask price, while all of the roughly 4,200 contracts traded at the July strike have changed hands at the bid price. Volume is easily outstripping open interest at each option, so it's safe to assume new positions are being initiated here today.

By buying to open the weekly 33.50-strike put for a volume-weighted average price (VWAP) of $0.11, these short-term speculators will profit with each step south of $33.39 (the strike minus the premium paid) T makes by week's end, when the options expire. Meanwhile, the July 2013 31-strike put sellers are hoping T maintains its perch above the $31 level through July expiration, allowing them to pocket the full potential profit on the play of $1.25, which Trade-Alert indicated was the VWAP.

Expanding the scope, speculators have shown a preference for puts over calls in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), T maintains a 10-day put/call volume ratio of 1.14. This ratio ranks higher than 67% of other such readings taken in the last year, implying puts have been bought to open over calls at a faster-than-usual clip throughout the past two weeks.

Even more telling of this penchant for puts is T's Schaeffer's put/call open interest ratio (SOIR) of 2.27. Not only does this show put open interest more than doubles call open interest among options with a three-month shelf life, but it ranks in the 96th percentile of its annual range. In other words, short-term speculators have been more put-heavy just 4% of the time within the last year.

Checking out T's technical backdrop, the stock has fared well on the charts. The shares have added more than 15% in 2012, and about 23% during the past 52 weeks. The equity took a post-earnings dive right out of the gate this morning, as Wall Street responded poorly to T's slowing subscriber base. In fact, the stock fell beneath its 200-day moving average. However, the stock has pared some of these earlier losses, and is currently back on top of this psychologically significant trendline. The equity has not finished a daily close south of this level since Feb. 1.

Given T's solid showing on the charts, today's put buyers may simply represent shareholders protecting their portfolios against an additional pullback. By initiating the weekly puts, investors can guard their paper profits against any more post-earnings downside T may see through Friday's close.

Meanwhile, should T tumble below the $31 mark over the next eight months, the put sellers may be required to purchase the shares at the strike price, regardless of how low the stock may go. Given the length of the option's life, these traders may also be content to get "paid to wait" for a lower entry point on T shares, another common goal of the put-selling strategy. The effective entry price if the put moves in the money is $29.75, or the strike price less the initial premium collected.

At last check, T was down 0.4% to trade at $34.85.


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