Why Ingersoll-Rand PLC (IR) May Be Worth a Look For Option Bulls

Most option traders probably aren't targeting Ingersoll-Rand PLC (NYSE:IR) -- but maybe they should be

Oct 27, 2016 at 1:39 PM
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With earnings season in full swing, a number of big-name companies have been grabbing the headlines. There are plenty of lower-profile names out there that could provide value to investors, though. One such stock is air quality expert Ingersoll-Rand PLC (NYSE:IR), which is up 1.2% today at $67.14, after the firm blew past Wall Street's earnings estimates Wednesday morning. Aside from this promising fundamental development, IR stock seemingly has bullish value from a technical and sentiment standpoint, as well. 

Starting on the charts, IR has gained over 21% this year, with the $64-$65 area -- home to the stock's 2014 highs -- containing several pullbacks since late April. What's more, IR's historically significant 200-day moving average has been lurking just below in recent months -- as the shares have knocked out a series of higher lows -- and looks ready to step up as support. In fact, the trendline might help IR stock reclaim last year's all-time high just above $70. 

Daily Chart of IR

Despite the stock's solid performance on the charts this year, it continues to attract bearish traders. In fact, IR has seen short interest increase by an incredible 98% since the start of the year -- the ninth-largest increase among all the stocks we cover. If these bears make a quick exit in light of IR's impressive earnings, it could result in tailwinds for the stock. 

Options traders have also shown seemingly bearish tendencies, albeit amid relatively low volumes. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than 15 puts have been bought to open for every call during the past two weeks, and the resulting put/call volume ratio of 15.3 is just 7 percentage points from a 12-month high. 

Looking at nearer-term strikes, IR's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) -- which examines open interest on near-the-money options in the November series -- stands at 1.61. In other words, put open interest heavily outweighs call open interest. Indeed, put open interest on Ingersoll-Rand currently ranks in the 97th percentile of its annual range.

It should be noted, though, that some of this put activity could be due to shareholders hedging their positions against a surprise pullback, given the stock's positive performance on the charts. Even so, IR shares could benefit from a mass exodus of "vanilla" put players. 

As for analysts, the majority do recommend buying Ingersoll-Rand PLC (NYSE:IR) shares, but there are still six brokerage firms clinging to a "hold" rating. Well-deserved upgrades from this group could provide yet another lift for IR. On a related note, the stock received no fewer than five price-target hikes overnight, following the company's earnings release. 

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