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Procter & Gamble Bears See Downside Ahead

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Bearish puts have been in favor on PG lately.

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Bearish bets were all the rage on The Procter & Gamble Company (NYSE:PG) on Monday, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Throughout the course of yesterday's session, traders bought to open 8,063 puts, versus 302 calls -- bringing the stock's single-day put/call volume ratio to a lofty 26.70.

Drilling down on the specifics of Monday's activity, more than one-third of the day's put volume was centered at the January 2013 65 strike, which saw around 11,000 contracts trade. A healthy portion of these went off at the ask price, implied volatility ticked 1.4 percentage points higher, and open interest added 7,739 contracts overnight, making it safe to assume that new positions were created here.

In order for these out-of-the-money puts to be profitable by expiration, traders need PG to fall below breakeven at $64.74 (the strike minus the volume-weighted average price [VWAP] of $0.26) by Jan. 18. This is a 7.2% drop from current levels.

Expanding the scope reveals this bearish bias has been prevalent in the options pits during the past two weeks. The stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 2.86 ranks in the 99th percentile of its annual range. In other words, puts have been bought to open over calls with more rapidity just 1% of the time over the previous 52 weeks.

On the charts, PG has added a formidable 18% since hitting its year-to-date low of $59.07 on June 26. Additionally, the stock's 50-week moving average recently proved itself as a technical ally, after PG took a solid bounce off the trendline in mid-November. In light of this positive price action, the recent rush toward puts could simply be shareholders protecting their portfolios against a potential pullback.

In the near term, though, PG could find itself churning in a tight range. Peak put open interest in the soon-to-expire front-month series is located at the 67.50 strike. This level could create a foothold as the more than 21,100 contracts located here begin to unwind. Conversely, the December 70 strike is home to peak call open interest, with nearly 13,600 contracts in residence. This collection of bullish bets may translate into an options-related speedbump as front-month expiration approaches.

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

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