Put Players Target Struggling Tenet Healthcare Stock Ahead of Earnings

THC stock is spiraling today following an unencouraging analyst note

Nov 3, 2017 at 3:22 PM
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Tenet Healthcare Corp (NYSE:THC) is scheduled to report third-quarter earnings after the stock market closes on Monday. The healthcare name has a dismal history of post-earnings price action, with the shares settling lower in the subsequent session in five of the past eight quarters -- including a 14.4% plunge last August. For Tuesday's trading, the options market is pricing in a 12.9% single-session post-earning swing, regardless of direction, based on THC stock's at-the-money implied volatility (ATM IV) data.

Put players, meanwhile, have been blasting the stock ahead of earnings. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio sits at a top-heavy 2.62, and ranks higher than 94% of all comparable readings taken in the past year. Simply stated, puts have been bought to open relative to calls at a faster-than-usual clip in recent weeks.

However, not all of the put activity has been of the bearish kind. The stock's November 12 put has seen one of the biggest increases in open interest over the past two weeks -- with 10,094 contracts added. Data from Trade-Alert indicates this is mostly due to a 10,000 contract block that was sold to open on Friday, Oct. 20, by a trader setting a near-term floor for THC stock, or betting on a post-earnings volatility crush.

Today, however, call volume is accelerated, running at three times the average intraday pace as a result of traders buying to open the long-term January 2019 22-strike call. However, elevated volatility expectations are being eyed by one put trader, who may be utilizing Tenet Healthcare's weekly 11/10 12.50 and 13 strikes to initiate a short put spread in the series that expires at next Friday's close.

Regardless, now is certainly a more attractive time to sell premium on THC's short-term options than buy it. While the stock's Schaeffer's Volatility Index (SVI) of 90% ranks in the 84th annual percentile, its 30-day ATM IV of 78.9% sits higher than 95% of similar readings taken in the past year. These two volatility indicators suggest heightened expectations are being priced into near-term contracts.

Looking at the charts, Tenet Healthcare stock was last seen down 5.3% at $13.11, after Credit Suisse initiated coverage overnight with a lackluster "neutral" rating and $15 price target. Nevertheless, this is just more of the same for an equity that's down 28% from its early September peak of $18.16, pressured by a trendline connecting a series of lower highs. Plus, the shares hit a fresh eight-year low in mid-October following Trump's Obamacare executive order.

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