Options Update: Humana Attracts a Wave of Put Volume

Earlier this week, insurance provider Humana
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reported adjusted third-quarter earnings of $1.49 per share, topping Wall Street’s expectations by 2 cents per share. Despite the positive report, the shares have extended their poor price action, dipping below long-term support at the 30 level in today’s trading. With the stock seemingly in free-fall mode, it should come as no surprise that HUM has been heavily courted by put traders today.

Specifically, more than 17,000 HUM puts have traded so far today, outpacing the stock’s average daily put volume by nearly 10-to-1. What’s more, this spike in volume has placed the equity on today’s Intraday Volume Explosion List. However, it was the fact that nearly all of this volume changed hands at HUM’s November 30 and 40 strikes that caught my eye today.

Humana volume details

Looking at the chart above, you can see that 8,408 November 30 puts traded at the bid around 11:27 a.m. Eastern time. Simultaneously, 8,408 November 40 puts traded between the bid ($10.80) and ask ($11.20) prices. Combine the “between” activity on the November 40 put with the fact that open interest easily outnumbers today’s volume at this strike, and we are left with little to speculate on as far as the trader’s intentions. What’s more, the seemingly sold November 30 put position crossed the tape when HUM was trading below the strike, effectively placing the position in the money – not something you generally see when selling put options.

Anatomy of a Humana Put Position

If the November 30 put was sold, the trade would break down as follows: 8,408 November 30 puts were sold for $2.80, or a total credit of $2,354,240 — ($2.80 * 100)*8,408 = $2,354,240. As with all sold put positions, the trader keeps the premium collected as long as the shares hold above the sold strike through expiration. In this case, the trader actually needs HUM to rally about 2.6% in order for the sold November 30 put to be out of the money and avoid being exercised.

There are a couple of reasons that come to mind as to why someone would place such a trade, the most plausible being that the trader has shorted HUM shares and is trying to lock in a price at which to buy back the short position. However, since the November 30 put was seemingly paired with the November 40 put, I have no way of getting to the heart of the matter on this trade. That said, we can take a look at HUM’s technical and sentiment backdrops to get a better sense of where the stock is headed, even if today’s option’s activity fails to offer any clear clues.

Getting Technical

Technically speaking, HUM is off more than 59% since the beginning of the year. The shares have been plagued by resistance at their 10-week and 20-week moving averages, and their downtrend has accelerated since these intermediate-term trendlines formed a bearish cross in mid-October. Furthermore, as noted above, HUM has breached key long-term support at the round-number 30 level. This region could now provide overhead resistance for the shares, potentially stymieing any attempts at a rebound.

Weekly chart of Humana since January 2008 with 10-week and 20-week moving averages

The Sentiment Drivers

On the sentiment front, today’s surge in put volume could mark a shift in sentiment among options traders. Currently, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.53 indicates that calls nearly double puts among near-term options. Furthermore, this reading ranks below 79% of all those taken during the past year, meaning that investors have been more bullish only 21% of the time in the past year. If today’s attention to puts gains popularity, we could see HUM trend steadily lower due to an increase in selling as the bears begin to take control.

Wall Street analysts are also firmly in the bullish camp. According to Zacks.com, 8 of the 13 analysts following HUM rate the shares a “buy” or better. This configuration leaves ample room for potential downgrades, which could apply additional downward pressure to the security.

Sentiment indicators for Humana

The Verdict?

While I don’t have the full picture when it comes to today’s HUM trading example, I do like the idea of trading puts on the shares. However, instead of selling puts, a buy-to-open position looks much more lucrative. Today’s break below the 30 level could well mark the beginning of the equity’s next downleg, and a December or January 2009 35 put could be quite profitable if this situation continues to deteriorate.

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