Options Update: 3M Company Hit with Potential Put-Buying Activity

Prior to the open this morning, 3M Company
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announced that it has completed its acquisition of Financière Burgienne, a provider of finished license plates in France.

While this is clearly stirring news for the industrial goods and services conglomerate, the shares are feeling the pinch of broad-market weakness on this first day of December. In fact, the stock has dropped nearly 4% amid the wave of red washing over Wall Street, breaking below potential short term support/resistance at the 65 level in the process.

It could be that this breach of the 65 level prompted a wave of put volume on MMM this morning, as the December 65 strike is the most-active contract for the company so far. Overall, more than 20,000 MMM puts have changed hands today, outpacing the stock’s average daily put volume by a ratio of more than 4-to-1. This spike in put activity has also placed the shares on our Intraday Volume Explosion List. However, it was the more than 11,000 contracts that traded at the aforementioned December 65 strike that caught my eye today.

3M Company option volume details

The Anatomy of a 3M Company Put Position

Diving into the options data, I noticed that all of the MMM December 65 put volume traded at the ask price, suggesting that the stock was being targeted by buy-to-open put activity. Running with the put-buying theme, it would appear that a trader purchased 6,063 MMM December 65 puts at 10:02 a.m. Eastern time at an ask price of $3.75. The total outlay for this position would be $2,273,625 — ($3.75 * 100)*6,063 = $2,273,625. For this trade to reach break even, MMM would need to fall about 8.5% to $61.25 per share from yesterday’s close at $66.93 before the options expire on December 19. The maximum loss on this position is limited to the initial investment of $2,273,625.

By entering this trade, the investor is indicating that he expects MMM to fall sharply during the next several weeks. The shares have a good head start, slipping about 4% so far today, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

Technically speaking, MMM has held up better than its peers in the Dow Jones Industrial Average (DJIA), falling only 20% on a year-to-date basis, compared to the Dow’s drop of more than 33%. Recently, the shares have settled into a pattern of higher highs and higher lows, benefiting from the recent upward bias in the market. That said, MMM is still battling overhead resistance at its falling 20-week moving average. This trendline, in conjunction with its 10-week counterpart, has helped push the equity steadily lower since mid-October 2007.

This technical configuration bodes well for a December 65 put, with the exception of potential support near the 62 level, which is home to the stock’s 10-week moving average. Below this trendline, the next potential area of short-term support arrives at the round-number 60 level, which rests just below break even for a purchased December 65 put.

Weekly chart of 3M Company since October 2007 with 10-week and 20-week moving averages

The Sentiment Drivers

On the sentiment front, MMM has attracted its fair share of pessimism from investors, but there is ample room for the situation to deteriorate further. Currently, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.92 indicates that puts just barely outnumber calls among near-term options. This ratio currently ranks higher than 76% of all those taken during the past year, meaning that options traders are bearishly aligned toward MMM, though not excessively so.

Elsewhere, Wall Street has a bullish bias toward MMM. According to Zacks.com, 5 of the 9 brokerage firms following the shares rate them a “buy” or better, with 3 “holds” and 1 “sell” rounding out the coverage. With the shares locked in a long-term downtrend, and the global economic situation worsening, the likelihood of a downgrade from this bullish-leaning group is heightened, creating a measure of downside risk for the shares.

Sentiment indicators for 3M Company

The Verdict?

Certainly, a reversal of last week’s buying strength on Wall Street would bode ill for MMM. Furthermore, another round of poor economic data could also have an adverse impact on the company. Stacking these macro-economic concerns against the potential for extended technical declines and a worsening sentiment outlook paints a clear picture for a short position on the shares. As such, a December 65 put looks quite appealing in the current market environment for MMM. As a caveat, traders will want to adhere to strict loss-control practices on any position, as the recent whipsaw activity on Wall Street could easily turn your gains into losses in short order.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.