Option Bears Circle Sinking Cummins Inc., Joy Global Inc.

Cummins Inc. (CMI) and Joy Global Inc. (JOY) are exploring new lows, prompting bearish options volume

Dec 1, 2015 at 2:14 PM
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Engine manufacturer Cummins Inc. (NYSE:CMI) and mining equipment maker Joy Global Inc. (NYSE:JOY) are exploring new lows, due to some bearish brokerage attention from BofA-Merrill Lynch. Specifically, the analysts downgraded CMI and JOY to "underperform," and cut their price target on the latter to $10 from $12 -- in 12-year-low territory -- citing a "severe oversupply" in the global coal industry. Against this backdrop, option bears are coming out en masse.

CMI is down 7.4% at $92.98, and earlier touched a three-year low of $92.36. CMI puts are crossing the tape at 12 times the average intraday rate, and the stock's 30-day at-the-money (ATM) implied volatility (IV) has shot 17.9% higher to 26.1%. What's more, the stock's intraday put/call volume ratio of 2.57 stands higher than 91% of all other readings from the past year, and put volume is at its highest point of the past 52 weeks.

The weekly 12/4 94-strike put has garnered the most attention thus far. It looks like traders are buying to open the put at a volume-weighted average price (VWAP) of $0.61, meaning their profit will increase the lower CMI sinks beneath $93.39 (strike minus VWAP) by Friday's close, when the options expire.

While today's put volume is higher than usual, it's not too outside the norm for CMI. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day put/call volume ratio of 2.14 -- in the 84th percentile of its annual range. In other words, option buyers have initiated bearish bets over bullish at a faster-than-usual clip during the past two weeks.

That's not terribly surprising, considering Cummins Inc. shares have surrendered more than 35% in 2015, exacerbated by a dismal earnings showing in late October. And BofA-Merrill Lynch's abysmal rating isn't new, either; CMI boasts just six "buy" or better ratings, compared to 14 "hold" or worse opinions.

JOY was last seen 14.3% lower at $13.16, and fresh off a decade-plus low of $13.00. As such, the shares have been relegated to the short-sale restricted list.

Intraday put volume is running at six times the average pace, though calls remain the options of choice. In fact, roughly 13,000 puts and 14,000 calls have traded -- near the top of their annual ranges. The equity's 30-day ATM IV has spiked 14.6% to 63.2%, just 3 percentage points from a 12-month high.

It looks like short-term bears are buying to open the December 12 put at a VWAP of $0.37, making at-expiration breakeven $11.63 -- in new-low territory. Delta on the put has moved from 0.067 at yesterday's close to negative 0.28 today, reflecting the growing odds of an in-the-money finish on Friday, Dec. 18.

Meanwhile, the ISE confirms buy-to-open action at the December 15 call. By purchasing the calls at a VWAP of $0.31, the buyers will make money if JOY muscles back atop the $15.31 level (strike plus VWAP) by December options expiration.

Of course, it's worth noting that short interest on JOY represents more than 20% of the stock's total available float. By purchasing out-of-the-money calls, short sellers could be hedging their bearish bets in the event of a short-term rebound.

As with CMI, it's been a bleak year for Joy Global Inc. The shares have dropped nearly 72% in 2015, and option buyers on the ISE, CBOE, and PHLX have been placing bearish bets at a rapid-fire rate. The stock's 10-day put/call volume ratio on the exchanges sits at 1.14, higher than two-thirds of all other readings from the past year.
 

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