Put Buying Nears Extreme on Outperforming Archer Daniels Midland Company (ADM)

Technical support and an unwinding of bearish options positions could guide Archer Daniels Midland Company (NYSE:ADM) higher

Nov 22, 2016 at 1:30 PM
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Each week, Schaeffer's Quantitative Analyst Chris Prybal sends out an email focusing on outperforming stocks that continue to be underloved by Wall Street. For example, Prybal's latest email called out Illinois-based agricultural services firm Archer Daniels Midland Company (NYSE:ADM). Not only has ADM stock been gaining on the charts this year, but pessimism looms in and out of the options pits -- a bullish setup for contrarian traders

Taking a hard look at ADM's chart, the shares have gained an impressive 18.4% year-to-date to trade at $43.41. The stock briefly broke out to hit an annual high of $47.88 earlier this month, gapping higher after a solid earnings report, but the shares quickly backpedaled to the $42-$45 range where they've spent most of their time since May.

The $42 area is notable for a number of reasons. It is home to the stock's 80-week moving average, and also represents a 50% Fibonacci retracement of ADM's all-time highs from 2014 and its January lows from this year. This area looks destined to provide technical support for ADM stock in the near term. Meanwhile, the formerly supportive $44-$45 region has been a thorn in ADM's side of late, and represents a 61.8% Fibonacci retracement. An established breakout to the upside could be big for ADM.

Weekly Chart of ADM Nov 22

What's even more notable about Archer Daniels Midland is that options buyers have been overwhelmingly focused on put options. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), roughly 15 put options have been purchased for every call during the past two weeks. The resulting 10-day put/call volume ratio of 15.37 ranks just 3 percentage points from a 12-month high, so options traders have rarely preferred long puts over calls at such an extreme rate. An unwinding of these bearish positions could help ADM climb the charts in the weeks ahead. 

Meanwhile, ADM's Schaeffer's put/call volume ratio (SOIR) -- which tracks open interest levels among options expiring within three months -- clocks in at 1.63. Not only does this show that put open interest handily exceeds put open interest among near-term traders, but it also represents an annual peak.

Indeed, the stock's top open interest positions are the underfoot December 40 and 38 puts. Data from the major exchanges reveals a large number of these positions were bought to open, so "vanilla" traders have been betting on ADM moving below these strikes before the options expire on Friday, Dec. 16. Of course, it's also possible that some of the recent put buying could be attributable to ADM shareholders seeking an options hedge in the wake of the stock's recent quest for annual highs.

Still, pessimism is prevalent elsewhere. For instance, five out of eight brokerage firms rate Archer Daniels Midland Company (NYSE:ADM) shares a "hold" or "strong sell." Meanwhile, the stock's ascent on the charts has occurred amid a sharp drop in short interest, seen on the chart below. Still, ADM's short-interest ratio stands at a healthy 3.60, so there's certainly room for this short-covering trend to continue, helping the shares break out of their recent range. 

ADM Short interest Nov 22__

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