Option Bulls Pounce on Olin Corporation (OLN) Pullback

Olin Corporation (OLN) is reeling on a lackluster earnings estimate, but bullish options traders are undeterred

Jul 22, 2016 at 2:45 PM
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Olin Corporation (NYSE:OLN) has spiraled 23% lower to trade at $20.09, and in the process, has found a place on the short-sale restricted list. Sparking the sell-off, the chemical maker offered up a disappointing second-quarter earnings estimate, citing lower domestic demand, higher export volumes, and lower caustic soda prices. As the stock sinks, bullish options traders are trying to seize on a potential opportunity.

Taking a quick step back, RBC Capital has added to the headwinds, lowering its price target to $24 from $28 due to "significant time lags" in the caustic soda market. At the same time, the firm said caustic soda prices should move higher from July, so OLN's weakness could be a buying opportunity.

This theory is apparently appealing to one cautiously optimistic options trader. OLN calls are crossing at seven times the expected intraday rate, and it looks like the bulk of the activity may be a result of one speculator initiating a long call spread with the September 23 and 24 strikes. If that is the case, the bettor foresees the stock bouncing above $23 by September expiration, but lowered her the cost of entry for her bullish bet by selling to open the September 24 calls.

More broadly speaking, during the last 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open over 19 OLN calls for every put. If that's not enough, the resultant call/put volume ratio of 19.11 is just 1 percentage point shy of a 12-month peak.

That said, recent call buyers may have been driven by another motive. Short interest has risen sharply in 2016, more than doubling, and accounts for 12% of OLN's float -- or more than one week's worth of trading activity, at the stock's average volumes. In other words, short sellers may have hedged their bearish bets via protective calls.

Turning back to the charts, Olin Corporation (NYSE:OLN) may be in trouble this afternoon, but it's still soared 63% since its early February bottom. Meanwhile, shareholders and option bulls may be hoping for a bounce from the round $20 level, which has contained the stock's descent so far today.

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