Options Update: PNC Financial Services Draws Put Volume Ahead of Earnings

PNC Financial Services Group
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is scheduled to release its quarterly earnings report ahead of the market open on Tuesday, Feb. 3.

Wall Street is currently expecting a profit of 75 cents per share from the banking concern, down sharply from last year’s earnings of $1.07 per share in the same quarter. Historically, PNC has missed Wall Street’s expectations in 3 of the past 4 reporting periods, with an average negative surprise of 3.57%.

The recent turmoil in the global banking sector has driven investors toward a more bearish stance on the shares. Specifically, the International Securities Exchange (ISE) Chicago Board Options Exchange’s (CBOE) 10-day put/call ratio of 2.33 indicates that puts bought to open have outnumbered calls bought to open by more than 2 to 1 during the past 2 weeks. Today’s heavy put volume in the options pits appears, on the surface, to be a continuation of this trend.

So far today, more than 20,000 PNC puts have crossed the tape, placing the stock on our Intraday Volume Explosion List. However, sifting through the data reveals that the majority of these put contracts were likely sold-to-open – i.e. the initiation of put-sell positions. Looking at the chart below, you can see that most of the blocks trading on PNC’s February 25 put have changed hands at the bid price. Furthermore, the volume trading at this front-month contract far exceeds the 3,834 contracts currently open. Combining these factors serves to strengthen the argument that we are seeing the initiation of put-sell positions on PNC.

PNC Financial option volume details

The Anatomy of a PNC Financial Put Position

Running with this theme, I noticed that a block of 9,918 contracts changed hands at 10:02 a.m. Eastern time at the bid price of $1.40, suggesting that the options were potentially sold to open. The total credit received for this trade arrives at $1,388,520 — ($1.40 * 100)*9,918 = $1,388,520. Remember that a 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 Feb. 20, 2009.

By entering this trade, the investor is indicating that he expects PNC to hold steady despite the company’s looming earnings report next week. With volatility reigning supreme in the banking sector, such a bet is not without its risks. However, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

From a technical perspective, there is plenty of reason for investors to dislike PNC. The stock has dropped more than 50% during the past 52 weeks, exceeding the S&P 500 Index’s (SPX) loss of more than 38% for the same time frame. What’s more, PNC is battling overhead resistance at its falling 10-day moving average. This trendline has helped usher the shares steadily lower since early November.

Daily chart of PNC Financial since November 2008 with 10-day moving average

On the other hand, the stock has rebounded nicely in the past week. PNC is now trading above potential round-number support at the 30 level. While tentative, this region could help buoy the security in the event the company doesn’t provide any negative surprises in next week’s earnings report.

The Sentiment Drivers

Sentiment toward PNC is understandably bearish given the state of the banking sector as a whole. Wall Street analysts are firmly entrenched in the bears’ camp, as 8 of the 12 brokerage firms following the equity rate it a “hold,” according to Zacks. Furthermore, short interest accounts for nearly 4.5% of the stock’s total float. However, with PNC’s long-term decline as a backdrop, these bears may not be in any rush to cover their positions unless the company’s earnings report convinces them otherwise.

Sentiment indicators for PNC Financial

The Verdict? Trading options ahead of an earnings report is always risky. This is especially true when dealing with a banking firm in the current market environment. I certainly wouldn’t be trading calls on PNC ahead of its report, but buying puts prior to the event could be just as risky. In fact, selling a deep out-of-the-money put or call could be just the ticket to pocketing a bit of premium in this volatile trading environment. I’m not sure that the February 25 put is far enough out of the money, however, and would consider selling the 20 strike as a safer alternative.

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