Why I'm Betting Against Time Warner Cable In The Short Term

| About: Charter Communications, (CHTR)

Time Warner Cable (TWC) just reported an excellent quarter with increased Internet use accounting for a boost in revenues. The long-term outlook is bright for the company . However, it is facing two short-term headwinds, which I feel will knock the stock down for a better entry level and in preparation for this expected drop I bought a few put options.

First, TWC is being sued by Los Angeles County for about $700,000 for violations of the Digital Infrastructure and Video Competition Act of 2006. The potential verdict and more importantly with legal defense fees, this could swell to a few million dollars. The cost upfront is not all that damaging but the negative press could hurt the company in the greater market regions of LA county. Long term not a big issue, short term, potentially.

More importantly, TWC Time Warner Cable Inc. has filed a registration statement on Form S-3 and a prospectus with the Securities and Exchange Commission and announced that it has priced an underwritten public offering of $1.25 billion aggregate principal long-term debt, with amount of 4.5% debentures due 2042. The debentures will be issued by TWC and guaranteed by its subsidiaries TWC Cable Holding, and Time Warner (NYSE:TWX), BNP Paribas Securities Corp., Citigroup (NYSE:C) Global Markets Inc. and Morgan Stanley (NYSE:MS) & Co. LLC which are serving as the active joint book-running managers. Using the net proceeds from this issuance of this debenture, TWC is expected to fund general corporate purposes. This could include staffing, investment and the repayment of shorter-term debt. The issuance and sale of the debentures is expected to close on August 10, 2012. This closing should knock the stock down Friday and Monday. Investors betting on this drop bought over 5,000 AUG 18 $85 Puts at 0.20 debit. TWC is seeing a massive bearish options flow with a put/call ratio of 60.8.

Given the massive bets being made the stock will drop, and the high likelihood of the stock dropping after the close of the debenture issuance, long-term investors may have a buying opportunity Friday into Monday this week. Traders may want to follow the bearish options flow and pick up some puts.

Disclosure: I am short TWC.