Ugly Chart Sparks Put-Buying Binge

07/19/2011 6:00 am EST


Elizabeth Harrow

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

SuccessFactors, Inc. (SFSF) has failed to sustain its late-April high and has fallen steadily since. Now, put buyers are targeting the shares at a feverish pace, clearly betting on continued weakness.

Put players set their sights on SuccessFactors, Inc. (SFSF) last week, with volume accelerating to six times the expected level. A total of 3,580 puts changed hands on SFSF during the course of the Friday session, while just 614 calls were exchanged.

On the International Securities Exchange (ISE) alone, speculators on Friday bought to open 1,418 puts on SFSF, along with only 135 calls, netting the stock a single-day ISE put/call volume ratio of 10.50.

The day’s most active strike was SFSF’s August 28 put, where 2,031 contracts crossed the tape. About 76% of these puts traded closer to the ask price, suggesting they were purchased, and open interest at this near-the-money strike rose over the weekend by 1,872 contracts. In other words, it’s safe to assume that new bearish bets were added here on Friday.

The day’s put-heavy action continued a recent trend for SFSF. During the past ten days, options players on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 4.86 puts for every call on the equity. This ratio arrives in the 77th percentile of its annual range, revealing that traders have purchased puts over calls at a faster-than-usual pace lately.

After checking out the charts, the recent preference for pessimistically oriented options isn’t too surprising. SFSF has taken a turn for the worse since peaking north of the $40 level in late April. In fact, the stock has been pressured steadily lower in recent months by its ten- and 20-week moving averages, which previously served as support.

It’s an ugly chart to be sure:

Click to Enlarge

Still, contrarian traders might be encouraged with the higher put volume. If everyone is sure they’ll make money with the puts, it’s almost always a good sign they won’t.

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

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