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Bears Target Pandora Media Ahead of Earnings

Meanwhile, one speculator constructs a bear put spread on P

by 12/4/2012 2:28 PM
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Pandora Media Inc (NYSE:P - 9.35) is up about 4.4% today, as the company prepares to reveal fiscal third-quarter earnings after the close. Nevertheless, the stock seems to be caught in the bearish crosshairs, as roughly 19,000 puts have crossed the tape so far. This is almost 13 times the equity's anticipated intraday put volume.

A large portion of the trading has centered on the front-month series of options. Specifically, two blocks totaling 5,000 puts were bought at the December 9 strike for $0.85 each, while an equal number of puts were sold at the December 8 strike for $0.40 apiece -- resulting in a net debit of $0.45 per pair of contracts. This activity suggests the initiation of a bear put spread on P. Essentially, the speculator is counting on the stock to finish south of breakeven at $8.55 (bought strike less the net debit) by the time the closing bell sounds on Dec. 21, when these options are set to expire. His maximum reward is limited to $0.55, or the difference between the strike prices, minus the net debit. Conversely, his potential risk is capped at the net debit paid.

This uptick in put activity marks a change of pace for the security. In fact, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 12.35 for P. In other words, traders have bought to open more than a dozen calls for every put during the past couple of weeks. This ratio is just five percentage points shy of a bullish peak, meaning speculators have been purchasing calls over puts at a near annual-high clip.

However, it bears mentioning that short interest on the Internet radio darling jumped by about 14% during the last two reporting periods, and now accounts for 31% of P's available float. This implies that some of the recent buy-to-open call volume could be attributable to short sellers looking to hedge their bets. Either way, it would take more than 13 days to cover these shorted shares, at the equity's average daily trading volume.

Meanwhile, the majority of analysts covering P seem to have high expectations for the stock. Currently, the security sports 10 "strong buys" and two "buy" ratings, versus five "holds" and two "strong sell" recommendations. Furthermore, Thomson Reuters shows an average 12-month price target of $12.77 for the equity, representing expected upside of roughly 43% to yesterday's closing price of $8.96.

On the technical front, P has shed close to 19% on a year-over-year basis, while also trailing the broader S&P 500 Index (SPX) by nearly 28 percentage points during the past 60 sessions. However, thanks to today's surge, the stock is hovering just below its 20-week moving average -- a trendline not surmounted on a weekly closing basis since late September.

As previously noted, P is on deck to report quarterly earnings after the closing bell, and has topped consensus bottom-line estimates in three of the past four quarters. Analysts, on average, are expecting a profit of 1 penny per share. Should the company pull off another positive earnings surprise, today's bears could find themselves scrambling for the exits.


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