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Bullish Betting Ramps Up on Pandora


Are short sellers behind the growing appetite for Pandora call options?

The shares of Pandora Media Inc (NYSE:P) are testing support atop their 10-week moving average, a trendline that's ushered the stock nearly 40% higher in 2013. Against this backdrop, the options crowd is buying P calls at a faster-than-usual clip, either to bet on extended upside or to hedge their bearish bets.

During the past two weeks, speculators have purchased to open more than six Pandora Media Inc calls for every put on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). What's more, the security's 10-day call/put volume ratio of 6.36 ranks in the 86th percentile of its annual range, confirming that option buyers are scooping up calls over puts at an accelerated pace.

Echoing that trend, P saw roughly 37,000 calls change hands on Friday -- more than four times the norm. For comparison, fewer than 4,600 Pandora puts were exchanged. Digging even deeper, it appears one speculator sold a block of 8,850 June 15 calls to close for $0.85, and then purchased the same amount of calls to open at the June 17 strike for $0.50. Or, in simpler terms, the trader rolled the position up.

Of course, as alluded to earlier, the growing affinity for long calls -- especially of the out-of-the-money variety -- could be attributable to hedging activity among the shorts. Short interest edged 4.6% higher during the past two reporting periods, and now accounts for a whopping 31.6% of Pandora Media Inc's total available float. By purchasing out-of-the-money calls to open, the shorts lock in an acceptable price at which to repurchase their shorted shares, should Pandora rally within the options' lifetime.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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