Options Update: Option Players All Over Garmin’s Map in the Wake of a Downgrade

• April 10, 2008
• Mark Fightmaster

Charting a Path Lower

My wife will tell you that I am not what I term direction-inclined. Unless I’m driving on the West Side of Cincinnati (oh yes, in capital letters), then I need directions … or a cell-phone call to someone who can get me where I am going. While I am bad with directions, I haven’t given in and purchased a navigation system, mainly because they are too expensive. Well, judging from navigation-firm TomTom’s announcement this morning, I may not be the only fiscally minded, cartography-challenged person out there. The company cut its 2008 revenue outlook this morning and announced that it had lowered prices “earlier than expected in the first quarter.” This announcement trails on the heels of Garmin’s
announcement last week that its margins from personal-navigation devices will fall below 40% for 2008.

Further bad news found GRMN when Soleil Securities downgraded the firm to “hold” from “buy” this morning. In the wake of TomTom’s announcement and the ensuing downgrade from Soleil, shares of GRMN are more than 7% lower as we navigate through the trading day. This price weakness was accompanied by heavy option activity, which is what caught my eye today.

The option activity toward GRMN is of the put variety and lands the firm in one of the top spots of our Intraday Volume Explosion List this afternoon. The heavy activity has crossed at GRMN’s April 45 put (GQR PI), with volume of 4,122 contracts on open interest of 2,298. While this activity may not be initially impressive, the bears are running rampant in the option arena, with total put volume ramping up nearly 4 times the norm, checking in at 14,610 contracts.

Digging into the activity, there were no major (defined by 1,000 or more contracts) blocks that crossed the tape. However, I wanted to get an idea of whether the contracts were new purchases or liquidations. I conducted a very un-scientific sampling of the numerous transactions and found that a majority of the contracts were purchased.

With April option expiration in the cards next week, I thought we could take a look at the month’s open interest configuration. I added 2 arrows to the chart; the green highlighting peak put open interest and the orange highlighting peak call open interest. Peak put open interest rests at the 50 level, with a lead greater than 6,000 contracts on the 45 level. On the other hand, peak call open interest rests at the out-of-the money 60 strike. As we near April expiration, we could see this level act as a roadblock for any run higher.

Another Roadblock

Today’s heavy bearish activity is truly uncharted territory for option speculators. Coming into today’s session, GRMN’s Schaeffer’s put/call open interest ratio (SOIR) of 0.43 is lower than 96% of those taken during the past 52 weeks. This percentile reading reflects extreme bullish feelings from the options crew, and presents the opportunity for downside pressure should the sentiment unwind.

The equity faces another potential road hazard in the form of short interest. Currently, 13% of GRMN’s float is sold short. If the stock continues its downtrend (which we will get to momentarily), the addition of more short positions could further the slump.

A Negative Road Map

GRMN was a stellar performer, tagging an all-time high of $125.68 during October 2007. Since then, the shares have surrendered 61%. In that light, we see today’s slip as a continuation of a downtrend, but there is another fact that should sound alarm bells. If the stock closes below the 50 level this week, it would be the first time since early last year. A close below 50 would be significant as it would allow the level to step up and act as resistance as it did in the past.

Further resistance may come in the form of GRMN’s 10-week moving average. This descending trendline is dropping through the 60 region and has capped any attempted rallies since the beginning of December 2007. As this trendline continues to fall, it could move into position to strengthen the 50 level’s resolve.

The Verdict? It seems that the Schaeffer’s Contrarian Positioning System (SCPS) has located a rather enticing bearish contrarian play in GRMN. Sentiment is far too bullish toward a stock that has been traveling southward for the past 6 months. At some point, we could see all of these bullish feelings unwind and stifle the shares.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

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