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Options Activity Runs Hot on United Continental

One strategist employs a short straddle on UAL

by 12/3/2012 2:49 PM
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Options activity is flourishing on United Continental Holdings Inc (NYSE:UAL - 19.92) today, which has seen about 6,900 calls and 6,300 puts cross the tape -- about three times the equity's expected intraday volume for both.

Digging deeper into the data, it appears that a large portion of the trading has centered on the January 2014 20 strike. Specifically, a total of 5,000 calls were sold at this strike for $3.85 apiece, while an equal number of puts were simultaneously sold at the same strike for about $3.98 each -- yielding a net credit of around $7.83 per pair of contracts. According to Trade-Alert, these options were sold to open, confirming our suspicions of a newly added short straddle.

Essentially, the trader is predicting that the stock will finish at $20 by January 2014 expiration -- rendering the options worthless, and allowing him to pocket the net credit received, which represents the maximum profit on the play. On the other hand, if the stock goes up, his losses are theoretically unlimited. Should the stock go down, his risk is capped at $12.17, or the strike price less the net credit.

From a short-term sentiment scope, UAL puts seem to be preferred over calls. According to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 20-day put/call volume ratio checks in at 1.96. In other words, puts bought to open have almost doubled calls during the past month.

As a result, the Schaeffer's put/call open interest ratio (SOIR) for UAL sits at 1.81, with puts outpacing calls by a margin of nearly two to one among options slated to expire within the next three months. This ratio is just four percentage points shy of a bearish peak, meaning traders have rarely been more put-heavy toward the security during the past year.

Also of note, although short interest on the airliner depleted by around 15% over the last two reporting periods, these pessimistic bets still account for about 10% of UAL's available float. In fact, it would take almost nine days to buy back these shorted shares, at the stock's average daily trading volume.

Meanwhile, sentiment toward UAL is decidedly upbeat among the brokerage bunch. The security boasts seven "strong buy" endorsements, compared to four "holds" and zero "sell" recommendations. Even more telling, the equity's average 12-month price target stands at $27.33, representing a 35% premium to Friday's closing price of $20.22.

From a technical standpoint, UAL has tacked on roughly 6% year-to-date, and has outperformed the broader S&P 500 Index (SPX) by more than five percentage points during the past three months. However, a look at the charts shows that the stock just closed another month below its 10-month moving average, which has acted as resistance since July.

At last check, the shares are down about 1.5% to hover at $19.92.


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