Options: Bets on an Overbought Hartford

Although the stock is up 300% on its low, several concerns have one investor buying puts.
Author:
Publish date:

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Hartford Financial Services

(HIG) - Get Report

shares are up more than 300% since reaching a 52-week low on March 6 (the stock had plummeted to $3.62 from its a 52-week high of $73.89), but at least one investor is buying puts on a bet that these shares could currently be overbought.

Looking at the June 14 puts, we see more than 26,000 of these contracts traded at $1.35 per contract before 11:00 a.m. EDT with the stock at $14.39. About 30,100 June 14 puts traded vs. open interest of 5,504 today. Implied volatility of these puts increased to 111.5 from 106 at the beginning of the trading day.

Normal daily options volume in Hartford is approximately 20,000 contracts. About 50,000 Hartford option contracts changed hands in the first three hours of the trading day out of the 60,000 Hartford contracts that traded today. The bulk of that volume is put options in the June expiration month.

Hartford did not report significant news today and the company's earnings are not due out until after the market closes on July 27. On Wednesday,

Morgan Stanley

(MS) - Get Report

raised its view of the U.S. life insurance sector to "attractive" from "in line," which drove Hartford shares up to $15.61 before closing at $14.72 on the day.

Today, however, Hartford stock closed down 35 cents to $14.32. That the government allocated Hartford and other big insurance companies TARP money might be unsettling to some investors, especially after the company has rallied significantly since the beginning of March.

Bearish sentiment among some investors on Hartford might also stem from the company's $1.2 million loss in profits in the first quarter in addition to a $3.77 loss in earnings per share, which missed Wall Street expectations for a $3.05 loss. Hartford earnings per share could climb to $1.15 in the second quarter, according to analysts' estimates.

Put-buying activity such as this does not always mean that the stock will head lower. But after some analysts warned investors of insurance companies cleared for TARP money, at least one investor is buying downside protection following a few months of significant gains.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."