Option Bears Cheer as VW Suppliers BorgWarner Inc., Tenneco Inc Hit New Lows

Volkswagen suppliers BorgWarner Inc. (BWA) and Tenneco Inc (TEN) are exploring new lows

Sep 24, 2015 at 11:54 AM
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Volkswagen suppliers BorgWarner Inc. (NYSE:BWA) and Tenneco Inc (NYSE:TEN) are exploring new lows today, after the European automaker scandal grew legs. However, recent option traders are likely cheering the decline, with bearish bets trading at a rapid-fire rate.

BWA is down 3.6% at $37.59, and just touched a fresh two-year low of $37.33. The stock has shed roughly 12.5% so far this week, and is in danger of ending the month south of its 80-month trendline for the first time since March 2009.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity has racked up a 10-day put/call volume ratio of 4.39. In other words, traders have bought to open BWA puts -- typically a bearish move -- over calls by a margin of more than 4-to-1. What's more, this ratio registers in the 86th percentile of its annual range, implying that speculators have initiated these bearish bets over bullish at a much faster-than-usual clip during the past two weeks.

The 40 strike has been popular among short-term traders. Open interest at the October and November 40 puts grew the most of any strikes over the last five sessions. Those who bought the puts to open expect BWA to extend its slide south of $40 in the near term.

Further reflecting the skepticism in the options pits, BWA's Schaeffer's put/call open interest ratio (SOIR) sits at 1.78, indicating that puts nearly double calls among options expiring within three months. This ratio stands just a percentage point from a 52-week peak, underscoring the bigger-than-usual put bias.

Likewise, TEN has surrendered 8.1% to sit at $39.42, and just hit its own two-year low of $39.15. The equity has given up 16.3% this week, but could find an ally in its 80-month moving average, which contained TEN's pullbacks in 2011 and 2012.

Considering the security's swoon, it's no surprise to find a major put bias among "vanilla" option traders. The stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 4.81 indicates that speculators have purchased the stock's puts over calls at a near 5-to-1 clip during the past two weeks. 

Per Trade-Alert, 39% of TEN's options volume over the past five sessions has been skewed bearishly, with the October 46 put the most added-to strike. Buyers of the puts expect TEN to extend its retreat beneath $46 through the close on Friday, Oct. 16, when front-month options expire.

However, while option speculators are pessimistic toward BorgWarner Inc. (NYSE:BWA) and Tenneco Inc (NYSE:TEN), one group has yet to change its tune: analysts. BWA sports 11 "buy" or better ratings, compared to four "holds" and not a single "sell." TEN, meanwhile, boasts eight "buy" or better endorsements, compared to two "holds" and a lone "strong sell." The stocks' average 12-month price targets also stand at significant premiums to their new lows. Should analysts abandon ship -- as RBC did with sector peer Delphi Automotive PLC (NYSE:DLPH) today -- a wave of downgrades and/or price-target cuts could exacerbate selling pressure.
 

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