Put-Buying Bonanza for 2 Dodgy Stocks

10/17/2011 9:00 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

More bad news and bearish chart action have caused option traders to pile into puts on STEC, Inc. (STEC) and Genco Shipping and Trading (GNK), both of which have already been pounded this year.

Put volume skyrocketed late last week on STEC, Inc. (STEC), with 6,931 contracts crossing the tape so far—roughly four times the expected intraday activity. Meanwhile, only about 1,200 calls have changed hands.

Taking a closer look at option trading action, two back-month put strikes have attracted most of the attention. STEC’s November 11 put has traded volume of 2,456 contracts, while the November 10 put has seen 2,337 contracts exchanged. The majority of these puts crossed at the ask price, suggesting they were purchased. Currently, the stock is trading squarely between these two popular put strikes.

This increased attention to STEC puts comes on the heels of a negative note from JPMorgan, as the brokerage firm warned investors to "steer clear" of the stock. This gloomy commentary precedes STEC’s early-November earnings report, which may explain today’s interest in back-month put strikes.

However, there was already quite a bit of negative sentiment levied against STEC prior to this uptick in bearish option activity. Short interest accounts for no less than 24.6% of the stock’s float, and Zacks indicates that not one of the nine analysts following STEC recommends buying it.

For 2011, STEC is sitting on a steep year-to-date loss of 40.5%, but the shares have recently edged higher along newfound support at their ten- and 20-day moving averages.

See related: 7 Ways Moving Averages Can Mislead

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Put buyers are also active in Genco Shipping & Trading Limited (GNK), with volume rising to 1.28 times the norm late last week. A total of 2,227 puts changed hands on GNK during the course of one session, compared to 1,387 calls.

Data from the major options exchanges confirms the day’s bearish bias. Traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) bought to open 1,023 puts on GNK, along with 213 calls—resulting in a lopsided single-day put/call volume ratio of 4.80.

From a broader perspective, this skeptical option activity is just more of the same for GNK. The equity sports a ten-day ISE/CBOE/PHLX put/call volume ratio of 1.54, which ranks higher than 95% of comparable readings taken during the previous year. In other words, speculators have scooped up puts over calls at a faster clip just 5% of the time.

Short sellers are also piling on, with shorted shares accounting for a notable 23.3% of GNK’s float. At the stock’s average daily trading volume, it would take a solid week for all of these bearish bets to be covered.

See related: 3 Common Short Selling Mistakes

From a technical perspective, GNK has shed 41.6% of its value in 2011. The equity recently broke out above stubborn resistance at its ten- and 20-week moving averages, but a recent rally attempt was thwarted by the round-number $10 region.

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

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