Sohu.com Option Players Cover Their Bases Before Earnings

Schaeffer's Investment Research
  NOV 01, 2012 11:00 AM

SOHU calls were the options of choice leading into yesterday's session.

 


Beijing-based Internet issue Sohu.com Inc. (NASDAQ:SOHU) is scheduled to take its turn in the earnings confessional ahead of the bell next Monday. Option players have been accumulating calls in the weeks leading up to the event, per data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). As of October 31, during the course of the past 10 sessions, traders have bought to open 834 calls for every 100 puts. This call/put volume ratio of 8.34 ranks higher than 93% of other such readings taken over the last year, indicating calls have been bought to open over puts at a near annual-high clip over the last two weeks.

This call-skewed trend has translated into a Schaeffer's put/call open interest ratio (SOIR) of 0.79 for the stock, which shows call open interest outweighs put open interest among options expiring in three months' time. Plus, although this ratio's ranking in the 46th percentile of its annual range indicates this preference for calls is hardly at an extreme, it does show that short-term speculators are slightly more call-heavy at the moment than usual.

It's more of a mixed bag outside of the options arena. For starters, short interest currently accounts for a lofty 10.4% of the stock's float, and it would take over two weeks to cover these shorted shares, at SOHU's average daily pace of trading.

Elsewhere, analysts are split, with five waving "strong buy" suggestions, and six maintaining middling "hold" recommendations. Meanwhile, the consensus 12-month price target of $52.37 not only represents a 37.7% premium to the stock's current perch, but also territory SOHU has not explored since late April.

Looking at SOHU's technical backdrop, the stock has had a dreary showing on the charts for some time. The equity has shed more than 45% on a year-over-year basis, and around 24% in 2012 alone. Plus, despite SOHU rebounding 12.7% since hitting an annual low of $33.75 on July 24, the equity is still staring at an overhead ceiling in the form of its 10-day moving average. This trendline has served as a stern layer of resistance since mid-September.

Given that SOHU jumped nearly 18% following its second-quarter earnings announcement in early August, the aforementioned uptick in call volume may simply be short sellers protecting their pessimistic positions in the case of history repeating itself. Wall Street is calling for a per-share profit of $0.46 in SOHU's third quarter.

In yesterday's session, though, puts emerged as the options of choice. As of the time of this writing yesterday, almost 3,000 put contracts had crossed the tape, representing nearly 11 times the average intraday pace for put options. By comparison, fewer than 300 call contracts had traded. This pickup in put volume comes as SOHU swoons in step with sector peer Baidu (NASDAQ:BIDU), who was hit with a slew of downgrades following its third-quarter earnings miss. At last check, SOHU was down roughly 1.4%.

This article by Karee Venema was originally published on Schaeffer's Investment Research.

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