Options Buying Opportunities on 3 Dow Stocks

Muted volatility expectations are being priced into Pfizer, International Business Machines, and General Electric stock options

Mar 9, 2017 at 11:36 AM
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With earnings season winding down, volatility expectations are dwindling for many stocks. As such, we've been identifying names offering attractive opportunities to options traders, thanks to well-priced premiums. Today, we're turning our attention to blue chips, with Dow components Pfizer Inc. (NYSE:PFE), International Business Machines Corp. (NYSE:IBM), and General Electric Company (NYSE:GE) among the stocks offering near-term options at a bargain. Below, we'll take a look at how shares of PFE, IBM, and GE have been performing, and why options traders may want to strike.

Short Sellers Pile on Pfizer

Drugmaker PFE took a hit earlier this week when President Donald Trump tweeted about drug pricing, but the stock has been setting a rising series of highs and lows for months, tacking on 13.2% since Election Day. The shares are 0.2% higher today at $33.97, following news the U.S. Food and Drug Administration (FDA) granted Investigational New Drug (IND) clearance to the company's leukemia treatment, UCART19 -- a joint venture with French drugmakers Servier and Cellectis SA (ADR) (NASDAQ:CLLS).

Despite Pfizer's solid technical performance, short sellers have been piling on, with their bearish bets increasing by 300% in the most recent two-week reporting period, to account for more than five times PFE's average daily trading volume. In other words, there's plenty of potential for a short-squeeze on this stock.

This heavy short interest may explain why calls have been so popular in PFE's options pits of late, as short sellers could be picking up these bullish positions as a hedge. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), calls have been bought to open at more than triple the rate of puts over the past 10 sessions. What's more, the resulting call/put volume ratio of 3.42 ranks in the 88th annual percentile.

Meanwhile, short-term options traders can score a bargain, as Pfizer Inc.'s Schaeffer's Volatility Index (SVI) of 14% -- lower than 94% of the past year's readings -- is pointing to historically low volatility expectations being priced in. Plus, a Schaeffer's Volatility Scorecard (SVS) of 90 indicates the options market has underpriced PFE's ability to make big moves on the charts over the past year.

IBM Can't Catch a Break from Analysts

Despite a 26.5% year-over-year advance at $177.30, tech firm IBM has seen little love from the brokerage bunch. Specifically, 12 out of 16 analysts rate the shares a "hold" or worse. Jefferies raised its price target on the stock by $20 this morning to $145, but this still represents a notable discount to current levels. IBM hit a two-year high less than a month ago, and has since pulled back to the 40-day moving average, which has been serving as support since early November.

In the options arena, speculators have hit a call-heavy extreme, with IBM's 10-day ISE/CBOE/PHLX call/put volume ratio of 3.01 docked at an annual high. But with short interest representing nearly seven sessions' worth of buying power, based on the stock's typical daily pace, it's possible recent call buyers are short sellers in disguise. Notably, short-term traders have been unusually put-skewed toward IBM, with the security's Schaeffer's put/call open interest ratio (SOIR) of 1.46 showing put open interest easily outweighing call open interest among options in the front three-months' series. Plus, this reading ranks in the top quartile of its 12-month range. From a contrarian perspective, an unwinding among unhedged short sellers and/or bearish options traders could serve as a technical boon.

In any case, now appears to be a prime time to pick up premium on International Business Machines Corp., as short-term options are unusually well-priced from a volatility standpoint. This, per the stock's SVI of 14% -- in the low 3rd annual percentile -- along with its SVS of 85.

GE Looks Overloved After Choppy Year

Industrial conglomerate GE has been choppy on the charts over the past 12 months, and was last seen just below the year-over-year breakeven level, at $29.76. Still, analysts remain relatively upbeat, with 60% rating the stock a "strong buy," while only one brokerage firm recommends selling the shares. Plus, the average 12-month price target of $33.73 stands at a level not seen by GE since 2008. Elsewhere, short interest represents a mere 1.1% of the stock's available float, even after climbing nearly 28% in the last two reporting periods.

Options traders have been similarly bullish, buying to open nearly three GE calls for every put over the last 50 trading days on the ISE, CBOE, and PHLX. The resulting call/put volume ratio of 2.69 is seated just 12 percentile points from an annual high. Regardless of whether it's calls or puts, short-term options buyers can find a bargain on General Electric Company options, with the stock's SVI of 12% in the 6th percentile of its 12-month range, and its SVS docked at 86.

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