In last week's edition of Trading Tools, I examined discount retailer
BJ's Wholesale Club (
BJ), as it appeared on the
Zacks Put/Call Ratio Greater than 1.0 filter. Utilizing the same screener this week, in an effort to find stocks surrounded by heavy pessimism in the options arena, another equity caught my eye: Pittsburgh-based
PNC Financial Services (
PNC).
Before we begin, let's explain the contrarian stance that makes Schaeffer's so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.
However, keep in mind that some optimism and pessimism is genuinely warranted and isn't always a contrarian indicator ? like an outperforming stock with many "buy" ratings or an underperforming stock with a plethora of "sell" ratings.
The Put/Call Ratio Greater than 1.0 Screener
First, an explanation on our stock screener. The filter looks for stocks with a high put/call open interest ratio, indicating puts outnumber their call counterparts amongst near-term options. Why is this important? Simply put, a high Schaeffer's put/call open interest ratio (SOIR) ? measuring options slated to expire within 3 months ? suggests that expectations for the security to rally are extremely low. In other words, a high ratio usually indicates pessimism amongst short-term options speculators.
From a contrarian perspective, we are looking for a stock that has low investor expectations (such as heavy put trading) and a strong technical performance. This combination of strength on the charts and skepticism among option traders leaves substantial room for continued upward momentum should these bearish bets unwind.
Pessimism prominent among put players
As mentioned above, PNC grabbed my attention not only because it's a financial firm, but because of its unusually high SOIR. More specifically, the security's SOIR currently stands at 1.65, indicating that puts outnumber their call counterparts among near-term options. What's more, this ratio ranks in the 87th annual percentile, meaning short-term options speculators have been more skeptical of the equity only 13% of the time during the past year.
In the front-month October series of options, peak put open interest is divided between the 60 and 65 strikes, home to roughly 18,000 contracts combined. Meanwhile, the October 55 strike is also popular, with more than 4,000 put contracts in residence. In comparison, peak call open interest is docked at the 80 strike, with fewer than 4,000 contracts.
A financial firm in positive territory?
We all know that the financial sector has been troubled lately, to say the least. So, one would think that heavy put open interest on a financial firm would be warranted.
But, after dissecting PNC's technical data, we find that the equity is faring much better than most of its sector comrades. In fact, on a day when the Dow Jones Industrial Average (DJIA) broke 8,000 for the first time in 5 years, the shares of PNC are trading in the black. What's more, the equity has outshined the S&P 500 Index (SPX) by more than 25% during the past 60 trading sessions.
Word on the Street
One of the reasons that the shares of PNC are defying the broad market could be a bout of analyst action (in addition to rumors that the company could snatch up lender National City).
The majority of analysts have followed options traders into the bears' lair. According to Zacks, only 4 out of 13 ranking brokers deem PNC worthy of a "buy" or better rating.
The bottom line...
In conclusion, while a good chunk of the financial sector has come under scrutiny recently, there are some that have held their ground. From a technical and relative-strength standpoint, PNC Financial could very well be the diamond in the rough. What's more, the shares remain surrounded by lingering skepticism. If the bears reevaluate their positions ? either in the options pits or analyst community ? it could place additional buying pressure on the security.
