After the flood, traders go with the flow

04/16/19
  • WTR dropped more than 4% yesterday but reversed intraday
  • Stock had a high put/call ratio yesterday
  • Company announced new stock issue

An up-trending stock suffers a sharp intraday loss in early trading, but rallies to recoup most of it and close toward the top of the day’s range.

If this sounds vaguely familiar, that’s because it’s similar to what happened last Thursday in Waste Management (WM)—see “Trading market shocks: Waste not, want not.”

Similar, but not quite the same. Traders looking at the LiveAction scan for stocks with high put/call ratios yesterday morning saw Aqua America (WTR)—a water (and waste water) utility operator, not a new theme park—high on the list, with nearly 58 put options trading for every call option:

LiveAction scan: Highest Put-Call ratio, 4/15/19. WTR put/call ratio nearly 58:1.

Source: Power E*TRADE


That was enough for sixth place on the LiveAction scan—and the highest among stocks trading at $20 or higher. A high put/call ratio can mean different things, depending on the specific circumstances:

1. Traders expressing a bearish outlook by purchasing options—i.e., puts—that can allow them to profit if the stock declines.

2. An extreme level of bearishness that may be a (contrarian) bullish signal if it accompanies a sharp sell-off after an extended downtrend.

3. Or, it can mean neither, if existing open put positions were being closed out.

In this case, the vast majority of the WTR put options volume (2,400 contracts) occurred in the April $35 puts expiring on Thursday. But the open interest—that is, the number of existing open trades—for these options was less than one-tenth of the volume, which means most of the day’s put volume consisted of a trader (or traders) getting out of the April $35 options, not getting into them.

It may not have been a bad idea, considering these options had increased in value by a factor of 10 in one day, jumping from $0.025 to $0.25, and the fact that around halfway through the trading session WTR had trimmed its loss to less than -1.5% and was at the very top of the day’s range:

Aqua America (WTR), 2/14/19–4/15/19. Aqua America (WTR) price chart. Closing the gap.

Source: Power E*TRADE


Now, getting back to what may have triggered the intraday drop, the only WTR news yesterday was that Aqua American was issuing around $1 billion of common stock to finance its pending acquisition of Peoples Natural Gas—a deal the company announced last October.1

So, it appears we may have a case of traders and investors discounting a stock because there will suddenly be more shares of it out there in the marketplace—aka “dilution.” But whatever potential downside they saw in the news seemed to evaporate pretty quickly: By 2:45 p.m. ET, WTR had trimmed the day’s loss to less than -1%.

It may have been a possible reassessment of the day’s news in the context of the Aqua America’s larger market position. The company has been active in a fragmented “water” space that has been seeing increased consolidation—water utility deals surged from 14 in 2017 to 33 in 2018.  Last year Aqua participated in $130 million worth of municipal water transactions, and the company says it already has $100 million in signed agreements for this year.2

So, although the specific short-term catalysts underlying the WM and WTR moves may be different, the implications of both events could turn out to be very similar.

Market Mover Update: Speaking of Waste Management (WM), the stock rallied nearly 4% intraday yesterday to a new record high of $105.68 before trimming its gain to around 2.5% late in the session. For the second time in the past two weeks, June gold (GCM9) retreated to support around $1,285/ounce.

Today’s numbers (all times ET): Industrial Production (9:15 a.m.), Housing Market Index (10 a.m.); China GDP, Industrial Production, and Retail Sales (10 p.m.).

Today’s earnings include: Bank of America (BAC), Comerica (CMA), First Horizon (FHN), Johnson & Johnson (JNJ), Omnicom (OMC), PacWest Bancorp (PACW), Pentair (PNR), Progressive (PGR), Prologis (PLD), UnitedHealth (UNH), CSX (CSX), IBM (IBM), Netflix (NFLX), United Continental (UAL).

 

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1 StreetInsider.com. Aqua America (WTR) Commences Common Stock and Tangible Equity Unit Offerings. 4/15/19.

2 Barron’s. Aqua America CEO Sees Surge in Water-Related Deals. 2/27/19.

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