Put Buying Catches Fire on Lowe's (LOW) Amid New Allegations

Lowe's Companies, Inc. (NYSE:LOW) is being accused of selling dangerous flooring

May 1, 2015 at 2:00 PM
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Put volume has exploded in Lowe's Companies, Inc.'s (NYSE:LOW) options pits, after allegations from hedge fund analyst Xuhua Zhou that the company has been selling flooring that contains dangerously high levels of formaldehyde -- the same accusation Zhou made about Lumber Liquidators Holdings Inc (NYSE:LL). As a result, puts are changing hands at nine times the expected intraday pace, with the May 67.50 put leading the way. Judging by data from the International Securities Exchange (ISE), some traders may be buying to open these options, and if so, they're betting on the shares to fall below $67.50 by the close on Friday, May 15, when front-month contracts cease trading.

Even before today, put buying had been picking up in LOW's options pits. In fact, the stock's 10-day ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio comes in at 5.06, meaning more than five puts have been bought to open for every call during the past two weeks. Plus, this ratio is only one percentage point from an annual bearish peak.

Analysts are somewhat split on LOW. While 12 brokerage firms rate the stock a "buy" or better, eight others deem it a "hold." Also, the stock's consensus 12-month price target sits at $79.22 -- territory never before charted.

On the charts, Lowe's Companies, Inc. (NYSE:LOW) has been less than stellar. For instance, during the past two months, the security has underperformed the S&P 500 Index (SPX) by close to 9 percentage points. However, it's worth noting that LOW's 14-day Relative Strength Index (RSI) was last seen at 28 -- in oversold territory -- which may explain why the equity is 2.2% higher amid the allegations to trade at $70.37.


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