CBS Corporation (CBS - 26.62) gapped higher on Wednesday, as
Wall Street cheered the media company's stronger-than-forecast
first-quarter results. The stock scored a slew of price-target
boosts in the wake of the report, with analysts at Barclays,
Benchmark, UBS and Wedbush all raising their forecasts for CBS
shares. However, one options player today is betting on CBS to
stagnate during the intermediate term.
Earlier today, two blocks totaling 10,000 contracts traded at
the bid price of $0.80 on CBS' September 30 call, with implied
volatility dipping 1.4 percentage points as a result.
Simultaneously, two matching blocks of 10,000 contracts changed
hands at the bid price of $0.80 on the stock's September 23 put --
again, prompting a 1.4 percentage-point drop in implied volatility.
Today's volume is easily outstripping open interest at both
strikes, suggesting that all of these options were freshly sold to
In other words, this appears to be the initiation of a
on CBS. By selling an equivalent number of out-of-the-money puts
and calls, the trader is looking to capitalize on an expected
period of range-bound price action for the shares. The maximum
potential profit is limited to the initial net credit of $1.60,
which the trader may keep in full if CBS settles anywhere between
$23 and $30 upon September expiration.
While the maximum reward is limited, the trader is facing
potentially high risk if his technical forecast doesn't pan out. If
CBS should fall below $21.40 (put strike minus net credit), the
trader will begin to incur losses on the put option. Meanwhile, on
the upside, losses will begin to mount following a move above
$31.60 (call strike plus net credit).
Checking out the stock's technical performance, CBS has marched
considerably higher from its March 2009 all-time nadir of $3.06.
However, in the intervening months, there have definitely been some
opportunities to profit from range-bound price action. From
December 2009 through September 2010, for example, the stock was
pinned in a five-point range between $12 and $17.
Plus, in the wake of its earnings-related breakout, CBS now
sports an inflated Relative Strength Index (RSI) of 73 --
indicating the shares are short-term overbought, and potentially
due to consolidate some gains. This would be a welcome development
for the short strangle speculator.
Scanning the rest of the stock's sentiment backdrop, traders in
general seem to be bracing for a pullback. CBS' Schaeffer's
put/call open interest ratio (SOIR) stands at 1.25, revealing that
puts outnumber calls among near-term options. This ratio registers
in the 79th percentile of its annual range, just 21 percentage
points from a pessimistic peak.
During the past 10 days on the International Securities Exchange
(ISE), Chicago Board Options Exchange (
), and NASDAQ OMX PHLX (PHLX), CBS has earned a put/call volume
ratio of 0.42. This ratio ranks above 65% of other such readings
taken during the past year, implying that traders have purchased
puts over calls at a modestly accelerated pace in recent weeks.
Likewise, short interest is on the upswing. The number of shares
sold short swelled by nearly 102% during the past month, and
advanced by 6.4% during the most recent reporting period. These
bearish bets now account for 3.6% of the security's float.
It's worth noting that CBS trekked higher on the charts during
the last two weeks of April, despite the corresponding uptick in
short interest. The equity's ability to keep rising in the face of
this selling pressure points to deep-seated technical strength.
In fact, as CBS continues to climb the charts, an unwinding of
skepticism could help propel the stock even higher. As a result,
today's short strangle speculator may be at greater risk of
swallowing losses on his sold call, rather than the put.
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