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Deere Option Bears Circle Ahead of Earnings

Option players have been buying to open DE puts of late

by 11/20/2012 2:47 PM
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Pre-earnings puts are popular on Deere & Company (NYSE:DE - 85.38) today. Roughly 18,000 contracts have crossed the tape, representing nearly five times the average intraday put volume, and more than double the number of call options that have traded. The December 90 put is the most-active strike thus far, and has seen almost 4,500 contracts change hands on open interest of fewer than 1,600 contracts. These in-the-money options are crossing at both the bid and the ask price, suggesting a mix of sell-to-close and buy-to-open activity.

The volume-weighted average price for the December 90 put, as indicated by Trade-Alert, is running at $4.74. With DE currently trading near the $85.38 mark, some of today's volume here most likely represents speculators taking profits off the table ahead of earnings. However, for those traders who are initiating the long puts, they expect the stock fall below the breakeven level of $85.26 (the strike minus the average premium paid) by December expiration.

Expanding the scope, puts have been the options of choice at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) in recent weeks. In fact, the stock's 10-day put/call volume ratio of 1.54 ranks in the 82nd percentile of its annual range, suggesting puts have been bought to open over calls at an accelerated clip over the past two weeks.

On a technical basis, the stock has had a solid run up the charts, with the shares adding about 17.5% on a year-over-year basis. Plus, over the course of the past 60 trading sessions, DE has outperformed the broader S&P 500 Index (SPX) by more than 14 percentage points.

Given this solid technical showing, and considering peak put open interest in the front-month series stands at the out-of-the-money 82.50 strike, this recent buy-to-open put activity may simply represent shareholders protecting their paper profits against a potential pullback. As it turns out, the stock has been toying with its upper Bollinger Band of late, suggesting it was nearing overbought territory, and a consolidation may have been in the cards.

Additionally, DE is scheduled to unveil its quarterly earnings report ahead of tomorrow's open. The company has a mixed history in the confessional, besting analysts' bottom-line estimates in three of the last four quarters. However, the stock shed 6.3% following last quarter's miss. Shareholders may also be purchasing these protective puts as a guard against another earnings-induced slide.

At last check, DE was down 1% in today's session to hover near $85.38.


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