After discovering that shorts ramped ahead of earnings for Research In Motion (RIMM), I decided to check in again on the short interest in Lender Processing Services (LPS). Of course, I expected to observe short interest soaring ahead of the disastrous downward guidance LPS issued on June 16th. Much to my surprise, shorts instead dropped by one million shares (17%) even as the stock’s price fell by 12% over those first two weeks of June.
Short interest in LPS takes a surprising dip.Source: NASDAQ.com
So LPS caught bulls and some bears by surprise. However, the bearish reaction was swift. Not only did LPS close down 13% after the earnings and revenue warning, options players stampeded for puts. Schaeffer’s Investment Research reports that the put/call ratio jumped from 2.0 to an incredible 19.2! This open interest is still heavily concentrated in September strikes.
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Fear of more bad news swept over LPS after downward guidance.Source: Schaeffer’s Investment Research
I am sure vocal LPS short Cody Willard will be relieved to see that he has fewer shorts joining him in the stock, but the surge in put-buying could be even more significant for the company. This tremendous amount of put-buying must consist of a good amount of purchased protection for large holdings of shares. If so, LPS is likely to find a floor for the next few months. The stock could even begin some kind of counter-trend rally, especially as the company repurchases shares under its new $100M authorization. However, if LPS manages to crack fresh 31-month lows, I imagine even more shorts will rush in to join the renewed downward momentum.
Either way, none of this changes the grim and uncertain outlook for LPS. I will be returning to puts at lower prices (relief rally) or higher prices (new breakdown) from here. I am currently left with a small long position after closing out my puts on their June 17th expiration day. I purchased the puts following heavy activity around the $22.50 strike in late May after failing several times to "low-ball" my way into some of those extremely popular September puts.