Options Bears Ravage Stumbling Meritor, Inc. (MTOR)

Barclays laid into Meritor Inc (MTOR) this morning

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Published on Mar 19, 2015 at 2:18 PM
Updated on Apr 20, 2015 at 5:09 PM

A downgrade to "equal weight" from "overweight" at Barclays -- as well as a $2 price-target reduction to $15 -- has Meritor Inc (NYSE:MTOR) 10.8% lower at $12.21 this afternoon. In response, the shares have been placed on the short-sale restricted list. Speculators, meanwhile, are using puts as an alternative way to place bearish bets, with the contracts crossing at 36 times the expected intraday rate.

Options traders have taken a particular interest in the security's August 10 put, with data pointing to buy-to-open activity. Speculators purchasing these contracts are betting on MTOR to tumble below $10 by the close on Friday Aug. 21, when the options cease trading. For reference, the equity hasn't traded below the round-number $10 mark since mid-October.

Put buying isn't normally so prominent in MTOR's options pits, at least according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Across this group of exchanges, the stock has accumulated a 10-day call/put volume ratio of 60.50 -- a number higher than 91% of all similar readings from the past 52 weeks. Also illustrating speculators' preference for calls is MTOR's Schaeffer's put/call open interest ratio (SOIR) of 0.67, which is in the 28th annual percentile. This indicates short-term traders are more call-skewed than normal.

It's worth considering, though, that it would take over seven sessions to buy back the nearly 6 million MTOR shares that are sold short. Therefore, some of the call buying could have been the work of bears hedging their bets against any upside.

Looking elsewhere on the Street, three analysts say the shares are a "buy" or better, with the remaining five handing out "hold" recommendations. MTOR's average 12-month price target stands at $15.83.

Today's drop is just rubbing salt in Meritor Inc's (NYSE:MTOR) proverbial wounds, as it has now lost 14.6% in March. What's more, the equity's 10-day moving average, which served as support in February, now appears to have switched roles, pressuring the shares lower.

Daily Chart of MTROR since February with 10-Day Moving Average

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