Avis Budget Group Inc. (CAR) Rally Drives Unusual Options Volume

Avis Budget Group Inc. (CAR) will join the MID at tonight's close

by Alex Eppstein

Published on Sep 16, 2016 at 2:00 PM

Avis Budget Group Inc. (NASDAQ:CAR) is speeding higher, amid news the car rental stock will be joining the S&P MidCap 400 Index (MID) at today's closing bell. Specifically, CAR will replace Questar Corporation (NYSE:STR), which is merging with Dominion Resources, Inc. (NYSE:D). Although AVIS shares are up nearly 7% at $37.50, it looks like some options traders still have their doubts.

CAR options are trading at a much faster-than-usual clip, with intraday volume in the 98th annual percentile. This is especially intriguing on the put side of the fence, where the 2,834 contracts on the tape are roughly seven times the typical intraday volume.

Delving deeper, one of CAR's most active strikes is the soon-to-be front month October 40 put. All signs suggest traders are buying new positions here, hoping the stock will reverse lower by the close on Friday, Oct. 21, when the series expires. The volume-weighted average price (VWAP) on the in-the-money put is $3.18, resulting in a breakeven mark of $36.82 (strike less VWAP).

Put buying has been relatively rare in the sessions leading up to today. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open over eight Avis calls for every put in the past two weeks. The resultant call/put volume ratio of 8.08 ranks in the bullishly skewed 85th annual percentile.

Regardless of the motivation, it looks like a great time to purchase premium on short-term CAR options. The stock's Schaeffer's Volatility Index (SVI) of 40% sits below 86% of all other readings from the prior year, hinting at relatively muted volatility expectations. Additionally, CAR's Schaeffer's Volatility Scorecard (SVS) of 91 suggests the options market has tended to underprice the underlying shares' ability to make big moves in the last year.

Speak of the past year, it's been a mixed bag for Avis Budget Group Inc. (NASDAQ:CAR). On the one hand, the stock is down 20% from where it was at this point in 2015. On the other, the shares have taken off since putting in a double-bottom around $22 in February and April.

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