E*Trade put volume on the rise ahead of earnings

By Doris Frankel

CHICAGO, Oct 14 (Reuters) - Put option volume in E*Trade Financial Corp (ETFC.O) swelled on Tuesday as option investors rolled over their soon-to-expire October bearish positions before the online brokerage's quarterly results next week.

E*Trade shares fell 2.27 percent to $2.58 on the Nasdaq after UBS cut its price target for the stock to $3 per share from $4 and held its rating on E*Trade at "neutral."

In the options market, E*Trade puts outpaced calls by more than 3 to 1, according to option analytics firm Trade Alert.

Volume was double the normal daily level with more than 32,600 contracts traded, dominated by 25,000 puts, which are contracts giving the right to sell the stock at a given price and time.

E*Trade is due to report third-quarter results on Oct. 21.

On average, analysts polled by Reuters Estimates expect the company to report a loss of 28 cents per share.

"The company's earnings history does little to embolden bullish investors as E*Trade has missed expectations in three of the past four reporting periods," said Joseph Hargett, senior equities analyst at Schaeffer's Investment Research in Cincinnati.

In July, the company reported a wider-than-expected second-quarter loss and warned it could see more losses as the economy deteriorates and more loans sour.

APPETITE FOR NOVEMBER PUTS

With October options going off the board on Friday and E*Trade due to report quarterly results during the November cycle, many option traders started to move their bearish positions to November or a later-dated month.

Particularly notable was the November $3 put strike where 11,530 contracts traded in what appeared to be a rollover from the same strike price in the October contract.

"With October options expiration this coming Friday, an investor or investors needed protection going forward. So they sold their October position in the $3 put strike and used the proceeds to help fund the purchase of the November $3 put strike," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group in Chicago.

Kinahan surmised the investor or investors probably own E*Trade stock and wanted downside insurance from the worst- case scenario should earnings be disappointing.

Anybody who is looking for an extended decline and wants to keep the bearish position would have to roll the October $3 put strike contract out to the same strike in November or a later-dated month, Hargett said.

One gauge of investor sentiment is Schaeffer's put-to-call open interest ratio for the top three months. That stood at 0.38 as of Monday's close, indicating nearly three times as many open call positions in E*Trade, compared to open put positions among near-term options.

"If that ratio rises, it means that more open puts are being added and expectations are declining for a positive report," Hargett said. (Reporting by Doris Frankel; Editing by Jan Paschal)