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Are 3M Shareholders Picking Up Protective Puts?

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Option traders' gloomy disposition toward MMM is a bit surprising, given the stock has advanced a steady 14.5% in 2012.

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Option players have exhibited a growing demand for 3M Co (NYSE:MMM) puts over calls of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio has risen to 3.96 from its late-November low of 0.93. This ratio ranks higher than 96% of other such readings taken during the past year, suggesting puts have been bought to open over calls at a faster clip just 4% of the time within the last year.

This trend toward puts is echoed in MMM's bearishly slanted Schaeffer's put/call open interest ratio (SOIR). Not only does the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.30 show that put open interest outweighs call open interest among options set to expire in three months or less, but it ranks in the 90th percentile of its annual range. In other words, short-term speculators have rarely been more put-heavy toward the equity.

While the day's most active strike is MMM's December 95-strike call, with the majority of the roughly 2,500 contracts going off at the ask price, one of the more popular bets is of the put variety. Specifically, MMM is seeing heavy volume at the December 92.50-strike put, which has also seen around 2,500 contracts change hands. Nearly all of these have of these have crossed at the ask price, implied volatility has edged higher, and volume is outstripping open interest. Putting it all together, it appears new bearish positions are being established here today.

By buying to open these near-the-money puts, traders will begin to profit with each step south of $91.89 (the strike minus the volume-weighted average price [VWAP] of $0.61) MMM takes through December expiration. This breakeven level is a slim 1.9% drop from the equity's current perch.

Option traders' gloomy disposition toward MMM is a bit surprising, given the stock has advanced a steady 14.5% in 2012. Additionally, the equity has rebounded 7.9% from its near-term low of $86.74, tagged on November 15. Helping support this recent run up the charts have been the stock's 10- and 20-day moving averages. This double-barreled foothold has given MMM a lift since November 20.

In light of this respectable technical showing, option players' preference for puts may simply represent investors protecting their portfolios against a potential pullback. With protective put players being shareholders first and foremost, though, they won't mind that MMM is up nearly 2% in today's session to trade at $93.67.

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

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