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Short-Term Put Buyers Brace for a Verizon Pullback

Weekly put options are popular on VZ today

by 11/7/2012 2:34 PM
Stocks quoted in this article:

Puts are easily outpacing calls on Verizon Communications Inc. (NYSE:VZ - 43.48) today. Roughly 54,000 puts have crossed the tape, more than four times the expected intraday volume. Meanwhile, around 22,000 calls have changed hands, about a 73% jump from its typical intraday pace.

Weekly puts are in focus, with traders honing in on the 42.50 and 43 strikes, which expire this Friday. The majority of the respective 2,833 and 2,397 contracts have crossed at the ask price, and volume is easily outstripping open interest, hinting at the initiation of new positions.

By buying the 42.50-strike puts to open, traders expect VZ to finish the week below the $42.34 mark (the strike minus the volume-weighted average price [VWAP] of $0.16). Meanwhile, by purchasing the 43-strike puts, speculators will profit with each step south of $42.78 (the strike minus the VWAP of $0.22) VZ takes by week's end. These breakeven levels represent a respective 2.7% and 1.6% drop from the stock's current price.

Expanding the scope, it seems short-term speculators have preferred puts of late, as evidenced by VZ's Schaeffer's put/call open interest ratio (SOIR) of 2.16. Not only does this show put open interest more than doubles call open interest among options with a shelf life of three months or less, but the ratio ranks in the 84th percentile of its annual range. In other words, near-term traders are more put-heavy than usual toward VZ.

On a technical basis, the Dow component has had a respectable run on the charts, with the shares climbing nearly 17% year-over-year. Highlighting this steady price action has been VZ's 32-week moving average, which has pushed the stock northward since July 2010. What's more, the equity hit an 11-year high of $47.32 on Oct. 5. After reaching this technical milestone, VZ broke through its upper Bollinger Band -- suggesting the stock had entered overbought territory -- and has since consolidated around the aforementioned trendline.

Given the stock's formidable presence on the charts, this recent affection for short-term puts may simply represent shareholders protecting their portfolios against a pullback. In fact, VZ is down 1.8% in today's bearishly slanted session, after announcing its plans to shutter the doors to its app store in January. The equity was last seen hovering near $43.48.


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