3 Stocks to Watch: Hewlett-Packard, Morgan Stanley, and NetLogic Microsystems

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Today's column includes a look at a rise in call trading on Hewlett-Packard ( HPQ ) and Morgan Stanley ( MS ), while put trading jumped on NetLogic Microsystems ( NETL ). Each day, 3 Stocks to Watch focuses on stocks seeing heavy options trading and gives you a unique insight into each stock's sentiment backdrop.

Hewlett-Packard ( HPQ )

Options players jumped on Hewlett-Packard Company ( HPQ ) on Friday, as more than 80,300 contracts crossed the tape. This surge in volume was more than double the stock's average daily option volume of 32,663 contracts, according to data from WhatsTrading.com. Furthermore, approximately 68% of the volume changed hands on the call side.


However, contrary to Friday's run on calls, the recent trend on HPQ has leaned toward puts. The International Securities Exchange (ISE) reports that HPQ's 10-day put/call volume ratio comes in at 0.39, which is higher than 51% of all those taken during the past 52 weeks.

Meanwhile, the Schaeffer's put/call open interest ratio (SOIR) for HPQ comes in at 1.20, as put open interest outnumbers call open interest among options slated to expire in less than three months. This ratio of puts to call is higher than 93% of all those taken during the past 52 weeks. In other words, short-term options players have been more pessimistically aligned toward the shares only 7% of the time during the past 12 months.

On the other hand, not everyone is quite so pessimistic toward the shares. According to Zacks , the stock has earned 22 "strong buys," six "buys," five "holds," and just one "strong sell."

Technically speaking, the shares of HPQ are up more than 12% since the beginning of the year. The stock has edged higher since hitting a low in the 38 area in August 2010, and is now battling former resistance in the 48 region. A break through the 48 region could shake loose some of the bears, creating a fresh influx of buying pressure.

 DAILY CHART OF HPQ SINCE MAY 2010

Morgan Stanley ( MS )

Morgan Stanley ( MS ) was the center of attention on Friday, as more than 127,300 contracts changed hands. This jump in volume was more than four times the stock's average daily option volume of 29,262 contracts, according to data from WhatsTrading.com. Meanwhile, roughly 74% of the volume changed hands on the call side.

MS Thursday reported earnings increased 60% during the last three months of 2010, beating analysts' estimates.

Call trading has been on the rise on the ISE and Chicago Board Options Exchange ( CBOE ). The 50-day call/put volume ratio comes in at 2.11, as call volume has more than doubled put volume during this time frame. This ratio is higher than 78% of all those taken during the past 52 weeks, pointing to a rising optimism.

The SOIR for MS comes in at 1.11, however, as put open interest outnumbers call open interest among options slated to expire in less than three months. This ratio of puts to calls is in the middle of its annual range, indicating a degree of complacency.

Meanwhile, we find pessimism on the rise among short sellers. During the most recent reporting period, the number of MS shares sold short increased by 9.5% to 19 million shares. However, this accumulation of shorted shares accounts for only 1.3% of the company's total float, offering little in the way of potential sideline money to push the stock higher.

After consolidating along the 24 level for several months, the shares of MS have shot higher and are rising along the support of their 10-day and 20-day moving averages. In fact, the stock has jumped above former round-number resistance at the 30 level.

 DAILY CHART OF MS SINCE AUGUST 2010 WITH 10-DAY AND 20-DAY MOVING AVERAGES

NetLogic Microsystems ( NETL )

Put trading was brisk on NetLogic Microsystems Inc. ( NETL ) on Friday, as more than 8,400 contracts crossed the tape. This surge in put volume was more than triple the stock's average daily put volume, according to data from WhatsTrading.com. In addition, roughly 68% of the volume changed hands on the ask side.

Friday's put trading may have been partially in response to an analyst downgrade. William Blair on Thursday lowered its rating on NETL from "outperform" to "market perform."

But NETL puts were a growing favorite even before William Blair weighed in. The ISE reports that 7.3 puts have been purchased for every one call during the past 10 trading sessions. This ratio of puts to calls is higher than 82% of all those taken during the past 52 weeks.

In addition, the SOIR for NETL comes in at 3.23, as put open interest more than triples call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 99% of all those taken during the past 52 weeks. In other words, short-term options player have been more pessimistically aligned toward the shares only 1% of the time during the past 12 months.

Short interest has started to unwind. During the past month, the number of NETL shares sold short dropped by nearly 8% to 14 million. However, this accumulation of pessimistic positions still accounts for more than 24% of the company's total float and is 16 times the stock's average daily trading volume. A continued unwinding of these bearish bets could add some lift to the shares, if they manage to get through the recent turbulence.

From a technical perspective, the shares of NETL had a rough week last week, with the stock gapping lower on Thursday. The equity is holding above support at its 10-week moving average, which has guided the shares higher since the beginning of October.

 WEEKLY CHART OF NETL SINCE MAY 2010 WITH 10-WEEK MOVING AVERAGE

Trading the News: A Contrarian View. Check out this special report from Bernie Schaeffer here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.



This article appears in: Investing , Options

Referenced Stocks: CBOE , HPQ , MS , NETL

Schaeffer's Investment Research

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