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Morgan Stanley Option Traders Brace for a Pullback


Morgan Stanley's May 21 puts are being bought to open today.

Put volume is accelerated on Morgan Stanley (NYSE:MS) today, and a group of these bearishly slanted option players are calling for the stock to lose ground over the next few months. Around 24,000 puts changed hands as of 11:17 a.m. ET today, representing an 84% mark-up to the average intraday volume, and a number of these contracts have crossed the tape at Morgan Stanley's May 21 strike. All of the 3,702 puts traded here have gone off at the ask price, implied volatility has ticked higher, and only 15 contracts currently make up open interest here, making it safe to assume that some of this volume is of the buy-to-open variety.

These out-of-the-money puts are being exchanged for a volume-weighted average price (VWAP) of $0.96, meaning traders will profit with each step south of $20.04 (strike less VWAP) MS takes through May expiration. This breakeven mark represents an 8.8% slide from current levels. At yesterday's close, delta for these puts was perched at negative 0.36, suggesting the options market is giving the positions a 36% chance of finishing in the money by expiration.

This appetite for short-term puts has been a developing trend in the options pits, per the stock's rising Schaeffer's put/call open interest ratio (SOIR). Since February 19, Morgan Stanley's SOIR has advanced to 1.38 from 1.04, as near-term put open interest jumped nearly 49%. This ratio now ranks in the 100th percentile of its annual range, indicating short-term speculators are more put-heavy now than at any other time within the past year.

Technically, the stock has been performing well in recent months. In addition to outperforming the broader S&P 500 Index (INDEXSP:.INX) by nearly 24 percentage points over the past 60 sessions, the equity is sporting a formidable 15% year-to-date gain. More recently, the security consolidated around its 40-day moving average, after tagging a fresh 52-week peak of $24.47 on February 20. However, a modest pullback this week has MS testing this trendline as a potential layer of support.

In light of the stock's strong start to the year, this rush toward puts could simply represent shareholders protecting profits against any additional downside in the near term.

At last check, the stock was down 0.3% to trade near $21.97.

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

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