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Option Idea of the Week: Avon Products, Inc. (AVP)

Bearish sentiment could add fuel to AVP's technical fire

by 5/3/2013 10:34 AM
Stocks quoted in this article:

Avon Products, Inc. (NYSE:AVP) has had a stellar ride so far in 2013, boasting a year-to-date gain of more than 61%, and outpacing the broader S&P 500 Index (SPX) by north of 25 percentage points during the past three months. In fact, the equity enjoyed a bullish gap on April 30 -- courtesy of a stronger-than-anticipated quarterly earnings report -- and tagged a new multi-year high of $24.30. On the charts, the stock remains perched above its 20-day moving average, which has acted as support since early December. Adding a bounty of skepticism into the mix, this outperformer could be ripe for the bullish picking in the short term.

Daily Chart of AVP since November 2012 With 20-Day Moving Average

Jumping right in, bearish traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have been enamored with the beauty products maven lately. In fact, puts bought to open have outnumbered calls by a margin of almost 9-to-1 during the last two weeks. This 10-day put/call volume ratio of 8.50 ranks higher than all other readings taken within the past year, indicating speculators have been picking up puts over calls at an annual-high pace.

In similar fashion, Schaeffer's put/call open interest ratio (SOIR) for AVP checks in at 1.68, with puts easily outstripping calls among the front three-months' series of options. This ratio is docked in the 98th percentile of its annual range, confirming short-term traders have rarely been more put-heavy toward the security during the last 12 months. This heavy accumulation of bearish bets -- especially at the May 21 and 22 strikes, which hold open interest of more than 15,000 contracts, collectively -- could end up translating into options-related support over the next several weeks.

Meanwhile, short interest on the equity jumped by almost 20% during the most recent reporting period, and now 7.5 million of AVP's shares are sold short -- signaling a considerable amount of sideline cash. This leaves the stock poised to benefit from a short-covering rally in the near term, should Avon Products, Inc. continue its cruise up the charts.

This pessimism toward the security isn't limited to the trading crowd. Of the 12 analysts covering AVP, only four have deemed the stock worthy of a "strong buy" endorsement, while the remaining eight maintain tepid "hold" recommendations. What's more, although the stock received a round of upward price-target adjustments at RBC, BMO, Bernstein, and Stifel Nicolaus just two days ago, Thomson Reuters shows an average 12-month price target of $25.08 -- reflecting a modest premium of just 8% over its present perch at $23.22. This leaves the door wide open for future upgrades and/or price-target hikes, which could propel the shares higher.

Options players wishing to bet on a continued run higher for AVP should think about purchasing the security's in-the-money July 17-strike calls, currently priced at $6.30.


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