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Travelers Attracts Skeptical Option Speculators

Despite a long-term uptrend, TRV puts are heating up

by 12/28/2012 9:05 AM
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Bearish speculation has accelerated on The Travelers Companies, Inc. (NYSE:TRV - 71.82) recently, with option traders buying puts at a rapid-fire rate. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the blue chip's 10-day put/call volume ratio of 1.36 registers in the 75th percentile of its annual range. Or, in simpler terms, speculators have initiated bearish bets over bullish at a faster-than-usual clip during the past couple of weeks.

As such, the stock's Schaeffer's put/call open interest ratio (SOIR) now sits at 2.69, indicating that puts nearly triple calls among options with a shelf-life of three months or less. What's more, this ratio stands just 4 percentage points from a 52-week peak, implying that near-term options traders have rarely been more put-heavy during the past year.

Echoing that trend, TRV saw roughly 3,150 puts change hands on Thursday -- about seven times the norm. For comparison, fewer than 200 TRV calls crossed the tape. Most active was the February 70 put, which saw close to 2,000 contracts traded. The majority of the puts traded at the ask price, and put open interest at the back-month strike swelled overnight, pointing to more buy-to-open activity.

By purchasing the puts to open, the buyers are expecting TRV to breach the $70 level within the next couple of months. More specifically, the volume-weighted average price (VWAP) of the puts was $1.46, meaning the buyers will make money if TRV drops below the $68.54 level (strike minus VWAP) by February options expiration -- which encompasses Travelers' fourth-quarter earnings release on Jan. 22.

Technically speaking, the pessimism plaguing TRV seems rather unwarranted, given the stock's impressive performance of the past year. In fact, the blue chip has blazed a slow and steady path higher in this timeframe, adding more than 20% atop its 10-week and 20-week moving averages. More recently, the equity pulled back along with the broader market, but could find a foothold in the former trendline, which has ascended into the $71.25 area.

Should TRV bounce off familiar support, or report stronger-than-expected earnings next month, an unwinding of skepticism in the options arena could add contrarian fuel to the stock's fire.

Weekly Chart of TRV since November 2011 With 10-Week and 20-Week Moving Averages


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