Bearish Betting Hits Fever Pitch as Traders Take Cover

Put buying has hit fever pitch amid the wild market swings

Sep 10, 2015 at 1:57 PM
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Amid the wild market swings of late, option traders have been buying puts at a rapid-fire rate -- either to bet on more downside, or to protect their stock investments. Among the names on the Most Active Puts list are oil-and-gas issue Transocean LTD (NYSE:RIG) and beauty behemoth Avon Products, Inc. (NYSE:AVP).

Before we jump into the aforementioned stocks, some statistics, courtesy of Schaeffer's Quantitative Analyst Chris Prybal. The 10-day equity-only buy-to-open put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) just hit 0.797 -- its highest reading since Jan. 22, 2009, just before we embarked on a major rally. Meanwhile, the 21-day equity-only put/call volume ratio across all exchanges sits at 1.07, marking its loftiest perch since Sept. 1, 2011.

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However, the bearish sentiment backdrop could be bullish, from a contrarian standpoint. Simply put, fear in the markets means there's still buying power on the sidelines -- just as we saw in early 2009.

Turning to equities in focus, RIG is on the list due to major put spread action in the November series, according to Trade-Alert, primarily at the out-of-the-money 9, 11, 12, and 13 strikes. On the ISE/CBOE/PHLX, RIG sports a hefty 10-day put/call volume ratio of 3.69 -- in the 72nd percentile of its annual range, pointing to a healthier-than-usual appetite for bearish bets. Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) now sits at 7.69 -- higher than 95% of all other readings during the past year, suggesting near-term traders have rarely been more put-stacked.

While RIG dodged the August bullet -- despite hitting a 20-year low -- the stock remains nearly 20% lower year-to-date, and was last seen 1.9% higher at $14.74, thanks to an energy boost. In other words, those November puts are still out of the money.

AVP is on the list due to action on Aug. 26, when a block of 65,000 April 2016 4-strike puts were apparently bought to open. By purchasing the puts to open, the buyer expects AVP to breach $4 by April options expiration. The shares are getting close to that goal; the stock was last seen 8.1% lower at $4.16, and just hit an all-time low of $4.07.

Still, AVP's option buyers have favored calls over puts. The stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 1.10 ranks above two-thirds of all other readings from the past year. An unwinding of this optimism could exacerbate selling pressure on the shares.

 

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