Traders Buying Insurance on Hartford

07/15/2011 8:00 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Put buying spiked this week on Hartford Financial Services (HIG) as some traders look to profit from recent weakness in the stock and existing longs look to hedge their open positions.

Insurance issue Hartford Financial Services (HIG) was a hot property in the options pits this week, with put volume accelerating to nearly three times the expected level. A total of 6,091 puts were exchanged on HIG during the course of Tuesday's trading alone, easily outstripping the stock's typical daily put activity of 2,121 contracts. Meanwhile, only 3,895 calls changed hands.

In fact, on the International Securities Exchange (ISE) alone, speculators on Tuesday bought to open 4,265 puts on HIG, compared to just 641 calls—netting the shares a single-day ISE put/call volume ratio of 6.65.

Over the past ten days, meanwhile, traders on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 0.72 puts for every call on HIG. This ratio registers in the 90th percentile of its annual range, pointing to a greater-than-usual appetite for puts relative to calls in recent weeks.

The most active strike is HIG's January 2012 12.50-strike put, where 1,799 contracts crossed the tape. About 89% of these puts traded closer to the ask price, and implied volatility jumped 5.9 percentage points by the close.

Open interest at the January 12.50 put increased overnight by 1,689 contracts, confirming the addition of new bearish bets at this deep-out-of-the-money strike.

The increasing interest in HIG's put options coincides with a period of weak price action for the stock, which is down 3.5% year to date. Since mid-March, the shares have been pressured lower by resistance at their ten- and 20-week moving averages.

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By purchasing these longer-term, far-out-of-the-money options, traders could be trying to capitalize on a continued downtrend for HIG over the next six months. The 50-day moving average crossing below the 200-day moving average—an “inverted golden cross”—may be what they are looking at.

See related: Golden Cross: Reliable in Any Market

On the other hand, traders may be buying these puts as "plunge protection," in order to limit their losses in the event of persistent weakness in the shares on long positions.

See video: Using Options as Portfolio Insurance

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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