(NYSE:P) is trending lower today after analysts at Lazard initiated coverage of the stock with a lukewarm "neutral" rating. Speculators also seem wary of the stock's prospects, as more than 5,000 puts have crossed the tape as of 11:18 a.m. EDT -- almost eight times P's expected intraday put volume. At the other end of the trading spectrum, about 2,500 calls have been exchanged. It appears that some of today's bears are betting on a significant pullback for the security over the next few months.
Most active has been the June 10 put, where more than 2,100 contracts have changed hands at a volume-weighted average price (VWAP) of $0.41. All of these puts traded at the ask price, and implied volatility has climbed 4.6 percentage points during the course of the session -- indications of buy-to-open activity. In order to realize a profit from these out-of-the-money puts, the stock must fall below breakeven at $9.59 (strike price less the VWAP) by June expiration. This reflects a drop of about 27% from Pandora Media's current price of $13.15, as well as territory not explored since early January.
Nipping at its heels is the even deeper-out-of-the-money June 9 strike, which has seen over 1,600 puts exchanged today. Again, since all of these contracts crossed at the ask price, and implied volatility was last seen 5.5 percentage points higher, we can assume new positions are being added here. In this case, speculators will profit if P retreats beneath the $8.77 mark (strike price minus the VWAP of $0.23) by the close on June 21.
Today's uptick in put activity flies in the face of P's recent trend in the options pits. In fact, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open more than 10 calls for every put during the last two weeks. The resultant 10-day call/put volume ratio of 10.07 ranks higher than 94% of similar 52-week readings, meaning speculators have placed bullish bets over bearish at a faster pace just 6% of the time during the past year.
This prevailing optimistic attitude toward Pandora Media isn't unwarranted, as the stock boasts a year-to-date gain of more than 43%, as well as a year-over-year advance of about 63%. Also, despite today's 0.8% decline, the stock continues to trade above its ascending 50-day moving average, which has served as support since mid-December. Considering P's longer-term uptrend, the aforementioned out-of-the-money puts could've been purchased by shareholders looking to lock in gains
This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.
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