Option Activity for Friday, August 21, 2010
I hope that your trading is going well, as I know that members of S.O.M.E. are making the most of the market movements and their returns.
Research In Motion Limited (RIMM)
Fundamental woes are adding up fast lately for Research In Motion Limited (RIMM). The BlackBerry parent has been butting heads all month long with regulators in India, Saudia Arabia, and the United Arab Emirates -- to name just a few nations -- regarding data security concerns. Meanwhile, RIMM's much-hyped Torch smartphone has debuted to a generally tepid reception, with the new gadget generating only a fraction of the excitement seen for new iPhone launches.
Perhaps it's no surprise, then, that RIMM has become the target of put buying activity in recent weeks. During the past five days, traders on the International Securities Exchange (ISE) have bought to open 15,992 puts on RIMM, compared to just 10,024 calls. In other words, speculators have scooped up 1.60 times more bearish bets than bullish during the past week.
Taking a slightly longer-term look, RIMM has earned a 10-day ISE put/call volume ratio of 1.14, which ranks higher than 93.5% of other such readings taken within the previous year. This elevated percentile rank suggests that traders have purchased puts over calls at a faster pace less than 7% of the time, marking a near-peak of pessimistically biased option volume on the exchange.
In the September series, which assumes front-month status as of Monday, speculators have honed in on RIMM's 55-strike put. This deep in-the-money option is home to peak put open interest of 18,323 contracts, with another notable accumulation of 16,445 contracts at the September 50 strike. RIMM just breached the $50 level earlier today, so we could see options traders refocus their attention on even lower put strikes during the coming weeks.
Elsewhere on Wall Street, short sellers have also taken a shine to RIMM. Short interest on the shares swelled by 47.8% during the past month -- rising by 30.4% during just the most recent reporting period. These bearish bets now account for 5.2% of the equity's float.
With buy-to-open put volume and short interest rising in tandem, it seems that both stock and options traders are growing more pessimistic toward RIMM. Analysts are also piling on with negative notes; during the past week alone, Wedbush Morgan slashed the shares to "neutral" from "outperform," and Morgan Stanley issued a drastic downgrade to "underweight" from "overweight."
Unfortunately, with Zacks reporting that no fewer than 28 brokerage firms still maintain a "buy" or better rating on RIMM, there's ample room for additional downgrades -- particularly in light of the company's well-publicized woes. Any more negative notes could spark fresh selling pressure on the security.
Checking out the stock's technical performance, RIMM has lost more than 25% in 2010, compared to a decline of about 4.2% for the S&P 500 Index (SPX). In fact, during the past 60 sessions, RIMM has lagged the SPX by roughly 15 percentage points, on a relative-strength basis.
As a result of its technical free-fall, RIMM has breached several former layers of support -- and it's also staring up at formidable technical resistance. For example, the $55 to $60 region served as a key technical floor for RIMM during late 2009, but support here couldn't stand up to a late-June surge in selling pressure. Going forward, this region could switch roles to act as resistance.
Even closer at hand is RIMM's 10-week moving average, which has smacked the stock steadily lower in recent months. In fact, the shares haven't finished a single week above their 10-week and 20-week trendlines since March.
Despite RIMM's former status as a Wall Street sweetheart, the recent uptick in put buying reveals that traders are keenly aware of the technical and fundamental challenges facing the shares. However, with so many analysts still firmly planted in the bulls' camp, there's plenty of room for sentiment to keep shifting toward the bearish end of the spectrum. During the short term, look for RIMM to extend its recent bout of technical weakness.
Nabors Industries Ltd. (NBR)
Nabors Industries Ltd. (NBR) is a potential candidate for a short stock position or a long put trade. Technically speaking, NBR has fallen more than 25% so far in 2010, with the equity's 10-week and 20-week moving averages providing pressure throughout the decline. In fact, the shares have closed only about eight weeks above this duo since January. Currently, NBR is attempting (and failing) to reclaim former support in the $16.50-$17 region. A rejection here could mark the beginning of another downleg for the security.
On the sentiment front, NBR still maintains a rather bullish contingent of analysts and investors, despite the stock's worsening technical outlook. For instance, 13 of the 23 analysts following the stock rate it a "buy" or better, with no "sell" ratings to be found. These bulls are beginning to question their positions, however, as Sterne Agee recently downgraded the stock to "neutral" from "buy." What's more, Thomson Reuters reports that the average 12-month price target for NBR rests at $24.95 per share - a premium of about 45% to the stock's close at $17.18 on Thursday. Any additional downgrades or price-target cuts could exacerbate NBR's current decline.
Outside of the analyst community, options traders are also heavily bullish on NBR. The stock’s put/call open interest ratio (SOIR) of 0.43 indicates that calls more than double puts among options with less than three months until expiration. This ratio also arrives at an annual high, meaning that these speculative investors have not been more bullishly aligned during the past year.
What's more, according to data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), many of these calls may have been bought to open. The current 10-day ISE/CBOE call/put ratio stands at an impressive 7.43, meaning that more than seven calls have been bought to open for every one put purchased in the prior two weeks. This reading also ranks above 94% of all those taken in the past year, revealing that the bulls have rarely snatched up calls at a faster pace during the prior 52 weeks.
Traders looking to take advantage of a continued downtrend for NBR should consider the stock's September 19 put.
Halliburton Co. (HAL)
Proving that even industry giants are susceptible to the current market environment, Halliburton Co. (HAL) has declined about 8% since the beginning of the year. For comparison, the S&P 500 Index (SPX) is down only about 4% for the same period. After rebounding nicely from its May low near the $21 level, HAL was rejected in the $31.50 region near the beginning of August, and the shares haven't looked back since.
The stock has met with short-term resistance in the $29 region, and was eventually turned away by its declining 10-day moving average. HAL is now trading below former support at its 50-day moving average, a trendline that has provided both support and resistance in the past.
From a sentiment perspective, HAL is flush with optimism. Options traders are particularly bullish, with the stock's SOIR of 0.72 arriving in the lower 18th percentile of its annual range.
Additionally, data from the ISE and CBOE reveal that calls bought to open have more than tripled puts purchased during the prior two weeks. This ratio also arrives just eight percentage points shy of an annual bullish peak.
Meanwhile, Wall Street is firmly entrenched in the bulls' camp. According to Zacks, HAL has attracted 27 "buys," three "holds," and no "sell" ratings. Additionally, the stock's consensus 12-month price target of $41.17 per share represents a premium of 44% to HAL's close at $28.56 on Thursday. Downgrades or price-target cuts could create additional downward pressure on the shares. Traders looking to take advantage of an unwinding of bullish sentiment should consider a September 30 put.
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