Youku Lures Short-Term Bears to the Options Pits

Schaeffer's Investment Research
  JAN 11, 2013 2:45 PM

Front-month put volume swells on YOKU.

 


China-based Youku Tudou Inc. (ADR) (NYSE:YOKU) has seen an influx of bearish betting today, as nearly 5,500 puts have changed hands as of 1:52 p.m. EST -- almost seven times the security's expected intraday put volume. Most popular has been the January 2013 20-strike put, where north of 3,400 contracts have traded at a volume-weighted average price (VWAP) of $0.29.

The majority of these out-of-the-money puts crossed at the ask price, pointing to buyer-driven activity.

Because this option currently holds open interest of fewer than 800 contracts -- coupled with the fact that implied volatility was last seen 6.8 percentage points higher -- it's likely that fresh bearish bets are being placed here today. Essentially, these traders are expecting the shares to retreat beneath the breakeven rail of $19.71 (strike price less the VWAP) by the close on Jan. 18, which is when these front-month options expire. This reflects a 7.6% drop from current levels.

Today's glut of put volume runs counter to YOKU's current trend. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 2.64, indicating calls bought to open have more than doubled puts during the past couple of weeks. This ratio ranks in the 71st percentile of its annual range, denoting a healthier-than-usual appetite for calls over puts.

However, it should be noted that short interest on the Internet issue skyrocketed by more than 153% during the last two reporting periods, and now makes up roughly 11% of YOKU's available float. This could be indicative of short sellers purchasing some of the aforementioned calls in an effort to hedge their bearish positions. Either way, it would take close to four days to cover these shorted shares, at the stock's average pace of trading.

Today's 2.4% drop notwithstanding, YOKU is off to a promising start in 2013, having gained nearly 17% year-to-date. In fact, the equity has recovered more than 54% since tagging an annual low of $13.82 on Dec. 7. Still, should the stock's intraday decline fail to extend beyond the current session, the most today's put buyers stand to lose on their bearish positions is the initial premium paid.

This article by  Terri Stridsberg was originally published on Schaeffer's Investment Research.

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