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Verizon Option Traders Brace for a Pullback


VZ put options were flying off the shelves this morning.

After coming within striking distance of an 11-year high on Thursday, the shares of Verizon Communications Inc. (NYSE:VZ) have pulled back along with the broader equities market. Against this backdrop, option traders are picking up short-term puts at a rapid-fire rate, either to bet on an extended dip or to protect their long stock positions.

As of 11:30 a.m. ET, VZ had seen roughly 12,000 puts cross the tape -- more than five times the norm, and more than four times the number of VZ calls exchanged. Nearly all of the action has centered around the March 44 put, which has seen more than 8,800 contracts change hands -- mostly in correlating blocks at 9:53 a.m. ET -- on open interest of fewer than 4,800, pointing to new positions. Plus, 100% of the puts traded at the ask price of $0.11, suggesting they were bought.

Assuming the buyers are simply "vanilla" option bears, their goal is for VZ to breach the $43.89 level (strike minus VWAP) within the next couple of weeks. The further the stock moves south of breakeven, the more the buyers stand to make. Currently, the puts' delta stands at negative 0.09, suggesting the options market is giving the puts a roughly 1-in-10 shot of finishing in the money. However, should VZ bounce back and resume its longer-term ascent, the most the buyers can lose is the premium paid at initiation.

On the other hand, if the buyers are VZ shareholders, their primary goal is still for the stock to continue its ascent. The puts merely act as options "insurance," locking in an acceptable price to unload their shares -- $44, in this instance -- should the equity take a turn for the worst before March 15, when the options expire. In other words, while a homeowner doesn't want a tornado to level his home, he's willing to fork over insurance premiums to sleep a little better at night.

Whatever the motive, today's penchant for puts marks a change of pace among VZ options traders. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open almost three calls for every put during the past two weeks. Furthermore, the stock's 10-day call/put volume ratio of 2.71 stands just 8 percentage points shy of a 52-week acme, suggesting option buyers are establishing bullish bets at a near annual-high clip.

As a result, the equity sports a Schaeffer's put/call open interest ratio (SOIR) of 0.88, indicating that calls outnumber puts among options with a shelf-life of three months or less. Compared to similar readings of the past year, this SOIR ranks in the eighth percentile, implying that short-term traders have rarely been more call-biased during the past year.

At last look, VZ is off 0.1% to flirt with the $46.49 level. Since skimming the $41.50 marker in mid-January, the security has added nearly 12% atop its 10-day and 20-day moving averages. However, the stock stalled in the aforementioned $47-$47.50 region, which rejected its rally attempt in October, and could present a short-term speed bump for the shares.

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

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