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Lowe's Traders Expect Limited Upside

LOW skeptics are selling out-of-the-money calls

by 12/6/2012 1:58 PM
Stocks quoted in this article:

The shares of Lowe's Companies, Inc. (NYSE:LOW - 34.98) are bucking the broad-market trend higher, and some options speculators are expecting the stock to remain near current levels through the short term. However, instead of employing near-term puts -- which seems to be a trend of late -- the investors are utilizing January-dated calls.

In afternoon trading, LOW has seen roughly 8,700 calls cross the tape -- a 74% increase over its average intraday call volume, and more than twice the number of LOW puts exchanged. A healthy portion of the action has centered on the out-of-the-money January 37 call, which has seen more than 3,000 contracts traded on open interest of fewer than 1,000 contracts, pointing to new initiations. Plus, 99% of the calls have changed hands at the bid price, underscoring our suspicions of seller-driven volume.

By writing the calls to open, the sellers are expecting LOW to remain south of $37 through the next couple of months. In this best-case scenario, the calls will remain out of the money, allowing the sellers to retain the entire premium received at initiation. Of course, considering LOW's quest for new highs of late, the call writers could be attempting to supplement income on a stagnating stock position.

As alluded to earlier, today's appetite for short-term calls runs counter to the trend. The stock's Schaeffer's put/call open interest ratio (SOIR) currently rests at 1.24, indicating that puts outnumber their call rivals among options with a shelf-life of three months or less. Plus, this ratio sits just two percentage points from a 52-week peak, suggesting near-term options players have rarely been more put-heavy during the past year.

At last check, LOW has surrendered 0.6% to hover just shy of the $35 marker. As such, the stock is on pace to end a second straight session beneath its 10-day moving average, after the company yesterday lowered its long-term earnings and same-store sales estimates, and CFO Bob Hull said 2012's performance is at the low end of expectations. Just Monday, LOW tapped an all-time high of $36.47.


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