Options Update: UAL Corp. Put Volume Soars on Bankruptcy Report
Shares of UAL Corp.
(
UAUA |
Quote |
Chart |
News |
PowerRating) were cruising along just below short-term resistance at the 12.50 level until about 11:00 a.m. Eastern time, when traders caught wind of an erroneous report that the United Airlines parent was on the verge of filing bankruptcy. The story was first posted in the Chicago Tribune, which said that the 4-year old story was mistakenly released. UAL immediately decried the report as “untrue.”
Unfortunately for UAL, the story was apparently picked up by the Sun Sentinel, after which the news gained traction with traders. UAL shares plunged nearly 100% by 11:07 a.m., touching a penny per share, and nearly wiping out the stock before trading could be halted. The company has since demanded a retraction from the Sun Sentinel, and said it is launching an investigation.
Trading has since resumed on UAUA shares, with the stock last seen hovering just below $12 per share – a vast improvement over pre-halt levels. Naturally, options traders jumped on this morning’s news, sending more than 14,800 put contracts across the tape on UAUA before trading was stopped. The wealth of bearish activity has placed the company on today’s Intraday Volume Explosion List, but it was the 3,700 contracts that traded at UAUA’s September 5 put that caught my eye.
Anatomy of a UAL Corp. Put Position
Digging into UAUA’s put volume, I noticed that the vast majority of today’s activity was focused in small blocks, ranging from 50 to 100 contracts. The lack of sizeable blocks, i.e. 1,000 contracts or more, hints that this put volume is speculation on the part of individual traders, and not the work of institutional or larger players. Looking more closely at the activity in the chart above, the majority of this volume changed hands closer to the ask price, indicating that traders were most likely initiation buy-to-open short positions on UAUA. One of the more speculative trades when off at 11:03 a.m., with a block of 100 UAUA September 5 puts trading at the ask price of $1.35 – we’ll use this trade as today’s example. Running with this put-buying theme, let’s see how the trade actually plays out:
The hypothetical trader purchased 100 UAUA September 5 puts for $1.35, or a total outlay of $13,500 — ($1.35 * 100)*100 = $13,500. For this trade to reach breakeven, UAUA would need to plunge 68% to $3.65 per share. We arrive at this by subtracting the cost of the option ($1.35) from the strike of the purchased 5 put ($1.35 – $5 = $3.65).
Clearly, today’s activity (especially the highly speculative puts changing hands nearer the time that UAUA was halted) was heavily speculative on the potential for a UAL Corp. bankruptcy filing. In fact, since the shares resumed trading, the September 5 put’s ask price has imploded to $0.10 – placing today’s hypothetical trade at a 92% loss already. But there are still about 2 weeks left until September options expire, so let’s see if there is even a remote possibility that this position can recoup some of today’s heavily losses.
Getting Technical
While the stock has certainly seen better days, the technical outlook for today’s hypothetical September 5 put is not very promising. UAUA may have declined more than 65% so far in 2008, but the stock is in the midst of a rebound from support at the 4 level. In fact, the equity has rallied more than 300% from its late-July low of $2.80 per share. During this time frame, UAUA has found support at its rising 10-week moving average, while logging 4 consecutive weekly closes above its 20-week trendline – a feat last accomplished in October 2007.
Currently, the shares are consolidating their gains near support at the 11 level. Additional support lies just beneath the equity at the 10 level – a region that also happens to be home to UAUA’s rising 10-week moving average. Furthermore, this trendline has just completed a bullish cross of its 20-week counterpart – a technical formation that often signals additional intermediate-term gains. So far, the possibility of UAUA dropping to the $3.65 area and placing the September 5 put in the money looks rather remote.
The Sentiment Drivers
There are a couple concerns on the sentiment front that could pressure UAUA shares lower over the intermediate term. First and foremost, options players have been heavily bullish toward the shares. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.33 indicates that calls outnumber puts by a ratio of 6-to-1 among options with less than 3 months until expiration. What’s more, this reading ranks below 79% of all those taken during the past year. However, some of this optimism can be dismissed due to the stock’s strong rally from its late-July lows, thus mitigating the contrarian impact of this low ratio.
Wall Street analysts are the next point of concern for UAUA. According to Zacks.com, 4 of the 9 brokerage firms following the shares rate them a “buy” or better. Any downgrades from this group could pressure the security sharply lower, but I doubt that the resulting selling pressure would be enough to send UAUA down for a retest of its July lows.
Finally, short sellers hold more than 21% of the stock’s float short, accounting for more than 26 million UAUA shares. This indicator could be the deal breaker for a September 5 UAUA put. The recent rally in the stock has already forced some of these bears to reconsider their positions, as the number of UAUA shares sold short dropped by nearly 8% during the most recent reporting period. If the shares can extend their positive price action, it could prompt more short sellers to buy back their losing positions. The added buying pressure would pressure a September 5 put even deeper out of the money, potentially forcing today’s hypothetical trader to settle for a complete loss on the position.
The Verdict?
While I realize that today’s example of a September 5 put on UAUA was purely a speculative play on a potential bankruptcy by the firm, the technical and sentiment data above would also deter me from most bearish positions on the shares. With the potential for unwinding short interest and rising technical support, the path of least resistance for UAUA appears to lie to the upside. However, there is enough risk from potential analyst downgrade and unwinding optimism from the options community that I would be hesitant to enter a long call position on the shares.
As for levels to watch for UAUA, keep an eye on overhead resistance at the 14 level (which halted the stock’s rally in late August), and potential support at the 10 level. A breach of 14, or a pullback to the 10 level could offer a nice entry point for a call position on UAUA shares.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.