Put Buying Increases in Ambac (ABK)

11/23/2009 11:11 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Call volume popped last week on Ambac Financial Group, Inc. (ABK), representing a notable deviation from the recent trend toward puts. In fact, the stock's ten-day International Securities Exchange (ISE) put/call volume ratio stands at 0.63, in the 95th annual percentile. In other words, option players have snapped up puts over calls at a faster pace only 5% of the time during the past year.

ABK price chartNevertheless, calls were in favor on Thursday. During the course of the session, traders on the ISE bought to open 1,287 calls on ABK, compared to just one put. The day's most active strike was the out-of-the-money November 1 call, with 9,099 contracts crossing the tape. Implied volatility shot 304% higher as a result, but open interest deflated overnight from 11,472 contracts to 9,263 contracts. In other words, the day's volume at this strike was most likely a mix of both newly added positions and liquidations of existing contracts.

ABK has been in the spotlight this week as investors fret about its liquidity position. The stock shot higher on Wednesday after the insurance issue said that the statutory capital of its main unit was well above minimum regulatory standards. However, the shares remain pinned beneath short-term resistance from their 20-day moving average.

While the stock seems an unlikely candidate for optimistic speculation, some of yesterday's call buyers might have been short sellers looking to hedge their bearish positions against an extended rally. Currently, short interest accounts for 15.7% of ABK's float.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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