Contrarians Will Love LVLT Put Action

09/21/2011 8:00 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Put buyers are piling into Level 3 Communications (LVLT) at a rate seldom seen in the past year, but a move through nearby resistance could spark a new bull run and make for an ideal contrarian play.

Traders veered toward bearish bets over bullish on Level 3 Communications, Inc. (LVLT) earlier this week, according to data from the major options exchanges.

During the course of Monday’s session, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) bought to open 1,262 puts on the tech stock, compared to only 401 calls. LVLT’s single-day put/call volume ratio of 3.15 confirms a strong preference for pessimistically oriented options.

This appears to be part of a growing trend on LVLT, which has now racked up a ten-day ISE/CBOE/PHLX put/call volume ratio of 0.88. This reading registers in the 94th percentile of its annual range, suggesting that options players have shown a healthier appetite for puts over calls only 6% of the time during the past year.

Short sellers are also upping the bearish ante on LVLT. Short interest rose by 11.3% over the past two reporting periods and now accounts for a substantial 10.8% of the equity’s float. At LVLT’s average daily trading volume, it would take more than nine days for all of these shorted shares to be covered.

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After checking out the charts, it’s not difficult to see why skeptical speculation is on the rise. LVLT boasts an impressive year-to-date gain of more than 60%, but the stock has beaten a steady path lower since early July.

This short-term downtrend has been highlighted by resistance at LVLT’s descending ten- and 20-day moving averages. It may also find resistance at its 200-day moving average.

However, contrarians may see the increasingly bearish view as the perfect sign that a bottom is near. A solid close above the ten-, 20-, and 200-day moving averages on strong volume would give a new bull run a healthy start.

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

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