Options Update: Are ProLogis Put Traders Calling a Bottom for the Stock?

Shares of the world’s number-1 warehouse and distribution center owner and operator ProLogis
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have surged more than 15% higher so far today.

Prompting the buying spree, the company indicated that it was ready to deleverage its balance sheet and that nothing was off the table in terms of its financial resources. The news follows on the heels of yesterday’s dividend cut and the resignation of CEO Jeffrey Schwartz.

Following this morning’s announcement, options speculators flooded the Street with put volume, as more than 20,700 PLD puts have changed hands so far today. This heavy put volume outnumbers the stock’s average daily put volume by nearly 17 to 1 and has placed the shares on our Intraday Volume Explosion List. However, it was the fact that nearly all of this activity was concentrated at PLD’s November 5 strike that caught my eye today.

Prologis option volume details

The Anatomy of a ProLogis Put Position

Diving into today’s activity, I discovered that nearly all of the more than 20,000 contracts that changed hands at PLD’s November 5 put appeared to have been sold. Open interest at this front-month option totals a mere 1,773 contracts, lending credence to the idea that the stock was targeted by sell-to-open put positions. Remember that a put-sell trader needs the shares to remain above the sold strike through expiration in order to keep the premium received. As you might have guessed, I will be running with a put-selling theme this afternoon.

Specifically, a block of 10,000 November 5 PLD puts traded at the bid price of $0.65 at 12:04 p.m. Eastern time, netting the trader a total credit of $650,000 — ($0.65 * 100)*10,000 = $650,000. As noted above, put-sell trader keeps the premium received on the trade as long as the underlying shares remain above the sold strike through expiration, which, in this case, is November 21, 2009.

By entering this trade, the investor is indicating that he expects PLD to remain above $5 per share through the end of next week. The shares have reclaimed potential short-term support at the 5 level following this morning’s announcement, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

Let’s be honest, PLD’s technical backdrop is beyond abysmal. The shares have plunged more than 92% since the beginning of January, compared to the S&P 500 Index’s loss of about 41% for the same time frame. What’s more, PLD is still battling overhead resistance at its 10-day and 20-day moving averages, trendlines that the security has only closed a handful of sessions above since mid-May. The equity has also shown no signs of slowing its descent.

However, all a trader needs in order to keep the credit received from selling a November 5 put is for PLD to hold above this level for the next 7 sessions. Along those lines, today’s announcement from the company could provide just the level of support needed to hold the shares aloft for the duration. There is also no immediate technical pressure just above the shares that could quickly scuttle the position. While the trade still looks exceedingly risky to me, the short-term technical outlook offers some positives for the positions.

Daily chart of Prologis since May 2008 with 10-day and 20-day moving averages

The Sentiment Drivers

On the sentiment front, there are 2 indicators that could potentially offer support for a November 5 put-sell position. The first resides on Wall Street, as Zacks.com reports that 9 of the 11 analysts following PLD rate it a “hold” or worse. Should these brokerage firms warmly receive the company’s moves to deleverage their balance sheet, we could see an upgrade or 2 for the security. While any ensuing rally could be contained by overhead resistance at the 10 level and the stock’s 10-day trendline, all a November 5 put-sell trader needs is for PLD to hold above the strike for a few more days.

The second indicator resides with short sellers, as 5.8% of the stock’s float is currently sold short. Now, I want to make it clear that I am not expecting a short-covering rally for PLD, as these bearish investors are far from begin forced to buy back their positions on this poorly performing stock. However, we could see a bit of profit taking from the group, given that PLD hit a fresh all-time low near $4 per share yesterday. The result of short sellers taking some profit off the table could be a short-term bounce for PLD due to the added buying pressure. Such a development might not prompt an all-out rally for the shares, but it could certainly keep the stock from dipping below $5 per share by next Friday.

Sentiment indicators for Prologis

The Verdict?

Personally, I am not completely sold on the idea of a PLD November 5 put-sell position. On one hand, we have a very short time frame, negative analyst ratings, and a wealth of short positions on the stock – all of which stand as solid potential benefits for the trade. However, the stock is hovering just above $5 per share in today’s trading -tagging a low of $4.40 and a high of $6.12. As such, it wouldn’t take much of a move at all to push the security back below the 5 level, thus scuttling the position in a heart beat.

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