Bears Cheer Avon Products, Inc. (AVP) Dive

Avon Products, Inc. (AVP) dropped big after announcing layoffs and a change of location for the company's headquarters

Mar 15, 2016 at 2:50 PM
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Cosmetics manufacturer Avon Products, Inc. (NYSE:AVP) is sinking 8.1% to trade at $4.03, after announcing it will cut 2,500 jobs while moving its headquarters from New York City to the U.K. -- though the company insists the move is not for tax purposes. AVP completed the sale of its North American business to private investment firm Cerberus Capital Management on March 1. But as the shares dip today, a crowd of already-bearish investors is likely to be cheering.

After hitting a record low of $2.21 in late January, AVP staged a rebound, nearly doubling by Monday's close. However, the shares ran into a speed bump in the form of their 200-day moving average -- a trendline they haven't toppled since October 2013 -- which has descended into the $4.50 region. What's more, this neighborhood has stifled AVP's previous recovery attempts since September.

160315AVP

It's little wonder, therefore, that two-third of analysts already rate AVP a "hold" or "strong sell." And while short sellers have backed off by 28.2% during the last month, these bearish bets still account for more than 9% of the equity's available float. At AVP's average pace of trading, it would take over a week to buy back all the shorted shares. Of course, today's big drop has put these bears on pause as the stock is now of the short-sale restricted list.

And while option volume is relatively light, on an absolute basis, recent speculators have been more pessimistic than usual. The security's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OM XPHLX (PHLX) sits lower than 74% of the past year's readings, at 1.59.

Moreover, AVP has a Schaeffer's put/call open interest ratio (SOIR) of 4.21 -- in the 79th annual percentile, indicating that short-term traders favor Avon Products, Inc. (NYSE:AVP) puts over calls by a wider-than-usual margin. Plus, the April 4 put is hands-down the most popular of any series, with open interest of more than 65,000 contracts -- nearly eight times the next most-popular strike. Buyers of these puts are hoping AVP extends today's downtrend and breaches $4 by the close on Friday, April 15, when the soon-to-be front-month contracts expire.

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