Extreme bearish option positioning toward United Continental Holdings (UAL) looks to be due to hedging, writes Karee Venema of Schaeffer’s Research, and this could help form short-term support beneath the shares.
In a recent research piece, Schaeffer’s senior quantitative analyst Rocky White broke down the May expiration cycle and how stocks on the S&P 500 Index (SPX) tend to fare. While compiling his data, Rocky noticed that the May series of options is more put-heavy than usual, and he honed in on a number of equities that were particularly exposed to a bearish bias despite their positive year-to-date returns.
One stock that made the list is airline operator United Continental Holdings, Inc. (UAL). On the charts, UAL has had a strong showing in 2012, adding 21.4% on a year-to-date basis.
From a longer-term perspective, the stock has been bouncing higher along its 130-week moving average. UAL has experienced only six weekly closes south of this trend line since August. More recently, the security has outperformed the broader SPX by 13 percentage points in the previous 20 sessions.
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Option players appear to be brushing aside UAL’s impressive technical backdrop. Traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.37 puts for every call over the last ten sessions. This ratio ranks higher than 94% of other such annual readings, suggesting that bearish bets have been scooped up over bullish at a near annual-high clip in recent weeks.
As it turns out, puts were the options of choice in yesterday’s session. Roughly 5,300 put contracts crossed the tape by mid-morning, representing two times their average intraday pace. Meanwhile, around 1,500 call contracts had changed hands, just a smidge more than half of their expected intraday volume.
According to Rocky’s data, UAL sports a front-month put/call open interest ratio of 2.67. In other words, there are nearly three puts for every call in the May series.
This preference for puts has translated into heavy accumulation of open interest at the May 20 and May 21 strikes. An unwinding of the hedges related to these puts could create a layer of options-related support for the equity in the near term.
By Karee Venema of Schaeffer’s Investment Research
