Negative news sparked noteworthy option activity on Massey Energy Company (MEE) and Bunge Limited (BG) on Thursday. While a slew of price-target cuts prompted heavy put volume on MEE, a post-earnings plunge inspired a fresh wave of call buying on BG.
Massey Energy Company
Traders on the International Securities Exchange (ISE) rushed to buy puts on MEE yesterday. During the course of the session, speculators on the ISE bought to open 1,034 puts on the coal concern, compared to just 119 calls. The stock's single-day put/call volume ratio of 8.69 underscores a strong bias toward bearish bets over bullish.
Thursday's uptick in put buying coincided with a trio of price-target cuts for MEE. Analysts at Jefferies & Co., Dahlman Rose, and Howard Weil all slashed their price targets on the stock yesterday -- and Barclays piled on today with another price-target reduction. This slew of negative notes comes on the heels of MEE's second-quarter earnings report, which hit the Street Tuesday night.
Judging by these downbeat brokerage notes, negative sentiment is building toward MEE. That theory is supported by the equity's 10-day ISE put/call volume ratio of 1.29, which ranks in the 81st percentile of its annual range. This ratio reveals that traders have purchased puts over calls at a faster pace only 19% of the time during the past year.
There's still plenty of room for pessimism to grow, though. MEE's Schaeffer's put/call open interest ratio (SOIR) stands at 0.96, in the 49th annual percentile. This middling SOIR suggests that complacency reigns among near-term speculators.
However, front-month put players seem to have very low expectations for the equity. Peak put open interest of 3,431 contracts can be found at the August 24 strike, which is roughly six points out of the money.
Traders on Thursday took a similarly dramatic approach, as MEE's deep out-of-the-money September 24 put experienced the largest increase to open interest overnight. This back-month strike added 913 new positions as a result of Thursday's trading, and now carries total open interest of 1,032 contracts.
This rising tide of skepticism isn't too surprising, given MEE's technical woes. The stock has swallowed a year-to-date drop of more than 27%, and it's on the verge of notching a second straight monthly finish below its 10-month and 80-month moving averages. Going forward, these trendlines could act as staunch resistance to thwart any rebound attempts by the equity.
Bunge Limited
On the other side of the coin, BG racked up notable call volume on Thursday. Roughly 8,174 calls changed hands on the fertilizer firm, representing about seven times the stock's expected daily call activity.
On the ISE alone, traders bought to open 1,049 calls on BG yesterday, compared to 75 puts -- netting the shares a single-day ISE call/put volume ratio of 13.99. In other words, speculators grabbed up nearly 14 times more bullish bets than bearish.
Most active was BG's October 50 call, which added 2,346 contracts to open interest overnight. With the stock trading just shy of $49 at last check, these back-month calls are narrowly out of the money.
Thursday's skew toward calls was a deviation from the norm for BG, which has racked up a 10-day ISE put/call volume ratio of 1.95. This ratio rests in the 77th annual percentile, revealing that traders have purchased puts over calls at a faster-than-usual pace during the past couple of weeks.
Short sellers also maintain a sizable stake on BG. The number of shares sold short climbed by nearly 11% during the past month, and short interest now represents a respectable 5% of the security's float.
In fact, with BG plummeting more than 14% yesterday on the heels of an earnings disappointment, it's possible that traders were buying calls only in order to hedge new bearish bets on the equity. By purchasing out-of-the-money calls, short sellers can limit their upside risk for a relatively minimal expense.
BG has bounced back about 6% at last check, but the stock is encountering pressure near the $49 level -- which is the site of Thursday's bearish gap. This level could continue to act as a technical ceiling during the short term, exacerbating the equity's technical woes. Even before Thursday's plunge, the stock was fighting a losing battle with resistance at its 80-day and 120-day trendlines.
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