Options Update: Masco Corp. Targeted by Unusual Put Volume
Masco Corp.
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MAS |
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PowerRating) manufactures, distributes, and installs home improvement and building products.
The company announced via press release today that it would report its fourth-quarter earnings results ahead of the open on Thursday, Feb. 12, 2009. The outlook for this quarterly report is not very constructive for MAS, with analysts expecting the company to swing to a loss of 5 cents per share from last year’s profit of 19 cents per share. Historically, MAS has missed Wall Street’s views in 3 of the past 4 reporting periods, with an average negative surprise of 19.3%.
Whether positioning ahead of the event, or just reacting to the souring state of global manufacturing, options traders have come out en masse on MAS today. So far, more than 11,000 MAS puts have crossed the tape, outpacing the stock’s daily put volume by more than 12 to 1 and placing the shares on our Intraday Volume Explosion List. Nearly all of this activity was centered at the security’s February 7.50 strike, changing hands at the ask price. Open interest at this front-month put totals a mere 3,391 contracts, suggesting that these options were bought to open.
The Anatomy of a Masco Put Position
Looking at the chart above, you can see that practically all of MAS’s February 7.50 put volume changed hands at the ask price. Of particular note is the block of 7,680 contracts, which traded at 10:23 a.m. Eastern time. This trade is even more intriguing, as it was marked as a “spread,” suggesting that another leg of this position exists. Digging into MAS’s options activity, I noticed a block of 3,840 July 10 calls crossing the tape at the same time on the same exchange. This block of call contracts is exactly half the number of the put block, and traded at the bid price. As such, this appears to be some sort of calendar/ratio spread.
Assuming these 2 blocks are related, the sold July 10 calls would cut the cost of purchasing the February 7.50 puts in half. Specifically, the total debit for the February 7.50 puts would be $422,400 — ($0.55 * 100)*7,680 = $422,400. Meanwhile, the credit received for selling the July 10 calls would be $211,200 — ($0.55 * 100)*3,840 = $211,200. By subtracting the credit received for selling the calls from the debit incurred by buying the puts, we arrive at a total cost for the position of $211,200 — $422,400 – $211,200 = $211,200.
If the trader in today’s example doesn’t own the shares, then MAS would need to plunge about 13.6% to $7.22 per share from the stock’s Thursday close of $8.36 before the options expire on Feb. 20 in order for this position to reach breakeven. The maximum loss on this position is hypothetically unlimited due to the sold July 10 calls. However, breakeven is lifted by about 28 cents per share due to the premium received from these sold calls.
By entering this trade, the investor is indicating that he expects MAS to plunge sharply in the coming weeks prior to February expiration. Furthermore, the trader also needs the shares to remain below the 10 level through July 17 when the sold calls expire. The position has started on the right foot, with the shares down nearly 4% at last check. Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
From a technical perspective, MAS has been locked in a near picture-perfect retreat since May 2007. During this time frame, the shares have steadily declined under resistance at their 10-week and 20-week moving averages. The former of these intermediate-term trendlines is perched in the 10 region, providing a layer of technical resistance that could help keep the sold July call out of the money.
Meanwhile, MAS’s long-term downtrend has shown very little signs of abating. In late September, the equity managed to peek its head above its weekly moving averages, but was immediately rebuffed by resistance at the round-number 20 level. On the other hand, technical support could manifest at the 7 level – site of MAS’s November lows, providing a bit of concern for the purchased February 7.50 put.
The Sentiment Drivers
Sentiment toward MAS is weighted toward the pessimistic end of the spectrum. Options traders are complacent toward the stock, as its Schaeffer’s put/call open interest ratio (SOIR) of 1.49 ranks near the mid-point of its annual range. However, all 9 brokerage firms following the equity rate it a “hold” or worse, according to Zacks. What’s more, 6.10% of the stock’s float has been sold short. These latter 2 indicators, while warranted due to the stock’s poor technical performance, could provide sideline money for MAS in the event of a positive earnings report.
The Verdict? In regard to today’s strange looking calendar/ratio spread, I have to say I’m a bit baffled. If the goal of the trader was to offset the cost of buying the February 7.50 puts, then why not match those contracts 1 for 1 with the sold July 10 calls to achieve an essentially free trade? As it stands, this position appears to be heavily bearish toward MAS. While I can’t disagree with a bearish take on the shares given their poor technical performance and the worsening global economy, I remain concerned that there is more to today’s trading example than meets the eye.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.