Traders Keep the Faith as Vipshop Holdings Ltd (VIPS) Skims Lows

Vipshop Holdings Ltd - ADR (NYSE:VIPS) is getting hammered on a cut to its third-quarter sales forecast

by Alex Eppstein

Published on Nov 13, 2015 at 2:01 PM

A downwardly revised third-quarter revenue estimate is taking its toll on Chinese e-tailer Vipshop Holdings Ltd - ADR (NYSE:VIPS) this afternoon. Specifially, the company -- which is scheduled to report official quarterly results next Tuesday evening -- said customers haven't been buying its higher-priced apparel due to warmer-than-expected fall weather. Traders are responding negatively, with the shares losing one-quarter of their value to hover around $13.92, and skimming an annual low of $12.86 earlier -- similar to what's happening at this brick-and-mortar counterpart.

With VIPS short-sale restricted, options volume is bursting at the seams. Specifically, the 20,000 contracts exchanged so far represents about five times the expected intraday amount. In terms of individual strikes, the November 14 call appears to be seeing some buy-to-open activity, as traders keep the faith on a rebound north of the $14 level by next Friday's close, when front-month options expire. Meanwhile, even shorter-term bulls are likely purchasing new positions at the in-the-money weekly 11/13 13.50-strike call -- anticipating some upside by tonight's closing bell.

Taking a step back, the rate of VIPS call buying has reached an annual extreme in recent months. Specifically, across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 3.72 calls for each put over the prior 10 weeks. This ratio ranks at the top of its 12-month range, evidencing a pronounced bullish bias among speculators.

They're not the only ones. A look at the brokerage crowd reveals that eight of nine analysts rate VIPS a "strong buy," with the outlier sporting a "hold" recommendation. Suffice it to say, a capitulation among either group of optimists could trigger headwinds on the stock.

Not everyone's sold on Vipshop Holdings Ltd - ADR (NYSE:VIPS). Nearly 40 million shares are sold short -- or 9.5% of the equity's float -- which is not far from record-high levels. With this in mind, it may be that some of the aforementioned call buying was at the hands of short sellers taking out options insurance.

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