Cheap Put Play on a Cheap Stock

10/05/2011 7:00 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

With bearish sentiment at maximum levels, option players are using puts to capitalize on continued downside movement in smokeless tobacco maker Star Scientific (CIGX).

Put options were in demand on Star Scientific, Inc. (CIGX) early in the week, with volume rising to more than six times the expected level on Monday alone. Approximately 13,000 puts were exchanged on CIGX during the course of Monday's session, as compared to just 835 calls, suggesting a distinct bias toward bearish bets on the stock.

This pessimistic slant is confirmed by data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Traders on these exchanges bought to open 5,945 puts on CIGX Monday, along with 287 calls, netting the shares a single-day ISE/CBOE/PHLX put/call volume ratio of 20.71.

In fact, bearish speculation on CIGX has officially hit annual-high levels. The stock's ten-day ISE/CBOE/PHLX put/call volume ratio of 1.77 arrives in the 100th percentile of its annual range, as does CIGX's Schaeffer's put/call open interest ratio (SOIR) of 0.93.

In other words, options players are more pessimistically positioned now than at any other time during the past year.

Monday's most active strike was CIGX's October 1.50 put, where 5,000 contracts were exchanged, 100% at the ask price, indicating they were most likely purchased. Open interest at this out-of-the-money strike rose overnight by 4,991 contracts, as traders apparently added a fresh batch of bearish bets here Monday.

On the charts, CIGX is clinging to a slim year-to-date gain of 3.6%. The stock is currently lingering between tenuous support at the $2 level and resistance at its ten-week moving average. CIGX's current 52-week nadir stands at $1.50, suggesting that new put buyers are bracing for a quick trip down to new-low territory.

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

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