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AOL Skeptics Ignore Bullish Signs

November bears toss AOL's upbeat earnings results to the wayside

by 11/8/2012 9:55 AM
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Just a day after AOL, Inc. (NYSE:AOL - 40.00) reported stronger-than-expected quarterly earnings, bearish traders converged on the equity with a vengeance. Roughly 18,000 puts changed hands yesterday, which was more than seven times the stock's average single-session put volume.

Most popular proved to be the out-of-the-money November 36 strike, which saw more than 4,200 puts cross at a volume-weighted average price (VWAP) of $0.45 each. The majority of these contracts traded at the ask price, suggesting they were bought. This strike saw an overnight rise in open interest of 3,829 contracts, signaling the initiation of new positions. Essentially, traders will profit from these bought-to-open puts as long as the stock falls below breakeven at $35.55 (strike price less the VWAP) by front-month expiration.

Nipping at this put option's heels was the November 40 strike, where north of 3,700 puts were exchanged -- again, most of them at the ask price, pointing to buyer-driven activity. Open interest jumped overnight at this strike, as well, implying that fresh bearish bets were established here yesterday. Because this option is at-the-money, these contracts traded at a higher VWAP of $1.16. In this case, the equity only needs to retreat south of $38.84 by Nov. 16 in order for speculators to realize a profit on their put purchases.

This uptick in put volume is more of the same for AOL. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 20-day put/call volume ratio stands at 1.85, indicating puts bought to open have nearly doubled calls during the past two weeks. Meanwhile, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.90 is docked in the 63rd annual percentile, meaning traders are more put-heavy toward the equity than usual.

Elsewhere, although short interest on the Internet concern depleted by more than 32% over the last two reporting periods, these pessimistic bets still account for 8% of the security's available float. In fact, it would take more than a week to cover these shorted shares, at the stock's average daily trading volume. However, this bodes well for the shares from a contrarian perspective, as AOL could end up reaping the benefits of further short-covering activity down the road.

Sentiment among analysts is evenly split, as AOL sports five "buy" or better ratings, compared to five "hold" or worse suggestions. Also, the equity's average 12-month price target stands at $37.17, representing a discount to Wednesday's closing price of $40.07. This leaves plenty of room for future upgrades and/or price-target hikes, which could provide a tailwind for the stock.

AOL has been knocking it out of the park on a technical basis, considering the security's year-over-year advance of nearly 167%, as well as its year-to-date gain of more than 165%. The stock has also bested the broader S&P 500 Index (SPX) by over 24 percentage points during the past 40 sessions. In fact, the shares touched an earnings-induced record peak of $41.80 on Tuesday. AOL is now trading well above its 10-week moving average, which has ushered the equity higher for more than a year.


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