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HP's Stock Set for a Rebound, Options Say

Hewlett-Packard's headquarters in Palo Alto, California.
AP
Hewlett-Packard's headquarters in Palo Alto, California.

Hewlett-Packard's sales outlook for the year may be gloomy, but the options market is saying the 10% slump in its shares Wednesday may be unwarranted.(Track HP here)

By early afternoon Wednesday, call volume in HP was nearly 105,000, versus put turnover of 81,463. That's well above the average call volume of 18,900 and put volume of 13,100.

"A big bulk of it was in March 44 calls," said Michael Schwartz, Oppenhiemer's Chief Options Strategist. "They're probably playing for a bounce, as the market tends to overdo things," he noted.

HP's stock has made a long, steady 25% climb since August. But Wednesday's newsthe computer giant slashed revenue forecasts swallowed a good part of those gains. Executives blamed weakness in the P.C. and tech services businesses. The miss is seen as a mark against CEO Leo Apotheker, who wrapped up his first full quarter at HP issuing lower guidance —something the company has rarely done in recent years.

Options activity showed sellers of HP's stock trying to keep a long position in case of a rebound in the shares, according to Brian Stutland, President of Stutland Equities and Options Actioncontributor. He noted that the biggest option trade saw a buyer of 15,000 Jan 2012 50 strike calls —equal to 1.5M shares of stock.

"It looks like the option trader also sold stock in conjunction with it in the tune of 515K shares," Stutland said, "thus, the trader might have been looking to either buy HPQ volatility for the next year or was looking to dump a long stock position, limit risk, and still maintain a long position should HPQ comeback by the end of the year with leverage to upside to make up for today's losses."

But that doesn't mean it's smooth sailing for HP from here on out .

Implied volatility rose Wednesday in HP's 3-month options from 25.65 to 26.34 for. Usually, Stutland notes, you would see option traders position for lower volatility moving forward after an earnings event, but clearly option traders expect some sort of volatility to continue, which might be related to the increase in volatility in the broader market.

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