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Bearish VeriSign Traders Bet on a New Annual Low

VRSN's December-dated puts gain traction

by 11/30/2012 2:41 PM
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VeriSign, Inc. (NASDAQ:VRSN - 34.02) has tumbled about 13.5% today, after the U.S. Department of Commerce limited the company's freedom to raise prices, effectively terminating a plan that would have enabled VRSN to implement four price increases of up to 7% during its six-year contract. As a result, bearish options activity has been running rampant on the equity, with roughly 45,000 puts changing hands -- nearly 11 times the norm.

Leading the pack has been the near-the-money December 33 strike, which has seen north of 6,900 puts trade at a volume-weighted average price (VWAP) of $0.81. The majority of these contracts crossed at the ask price, pointing to buyer-fueled volume. Since this option currently holds open interest of just 656 contracts, it is very likely that new bearish bets are being initiated here. In order for speculators to realize a profit from these bought-to-open puts, VRSN must retreat south of breakeven at $32.19 (strike price less the VWAP) by Dec. 21 -- a move that would push the stock into new annual-low territory.

However, VRSN's broader trend reflects a very different attitude in the options pits. In fact, the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio sits at 3.43, confirming calls bought to open have more than tripled puts during the last few months. This ratio ranks higher than 79% of comparable readings collected within the past year, signaling traders have been scooping up calls over puts at an accelerated pace.

Similarly, Schaeffer's put/call open interest ratio (SOIR) for VRSN checks in at 0.53, with calls nearly doubling puts among options slated to expire in the next three months. This ratio is docked in the 29th percentile of its annual range, indicating near-term traders have been more call-heavy toward the security less than one-third of the time during the past year.

Elsewhere, short interest on the Internet domain operator jumped by more than 15% during the most recent reporting period, and now accounts for over 8% of VRSN's available float. This could be indicative of short sellers contributing to the aforementioned buy-to-open call volume in an effort to hedge their bearish bets.

Meanwhile, sentiment among the brokerage crowd mirror's today's lack of confidence in the options pits. Only three analysts have deemed VRSN worthy of a "buy" or better recommendation, compared to seven lukewarm "holds," and one "sell" suggestion.

Technically speaking, VRSN has climbed just over 1% during the past year. However, a look at the charts shows that today's plunge marks the equity's second sizeable bearish gap in about two months. Should the stock continue to struggle in the near term, the previously mentioned December put players could end up profiting on their bearish positions.


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