Schaeffer's Midday Options Update Features Hewlett-Packard.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Hewlett-Packard (NYSE:HPQ). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day. The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Options Update: Hewlett-Packard Slips on Revenue Outlook

The major market indices are in the process of rebounding from their session lows, as investors are digesting the latest comments from the Fed. Shortly after the two o'clock hour, the Federal Open Market Committee decided to leave its benchmark federal funds rate unchanged at 5.25 percent and made little changes to its policy statement. The Fed repeated that, with core inflation elevated, "some inflation risks remain." The Fed acknowledged that recent economic reports have been mixed, but said despite this, the economy will likely grow at a moderate pace. The Fed also said that the cooling in the housing market has been "substantial."

In other economic news, the Treasury Department announced that the federal budget deficit narrowed in November to $75.6 billion from $83.1 billion a year ago. The monthly deficit was higher than the $73 billion estimated by the independent Congressional Budget Office. Outlays were about $3 billion higher than CBO assumed. Through the first two months of the fiscal year, the deficit is down about four percent to $124.9 billion compared with $130.3 billion this time last year.

Most-Active Options Update

At 2:30 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA - 12,317.7) has slipped 10.4 points, while the S&P 500 Index (SPX - 1,411.34) has dropped 1.70 points. The Nasdaq Composite (COMP - 2,432.1) has given up 10.9 points. At 2:31 p.m. Eastern Time, 3,656,170 calls have changed hands compared to 2,486,832 puts, equaling a single-day put/call volume ratio of 0.68. The CBOE's equity put/call volume ratio stands at 0.69, while the ISE's ratio weighs in at 0.77.

Hewlett-Packard

Options players appear to be bailing out of their bullish positions on Hewlett-Packard (NYSE:HPQ). More than 14,000 calls have crossed the tape at the stock's December 40 call so far today, on open interest of 57,518 contracts. How can we tell they are bailing out? Well, while this is speculation and will need to be confirmed upon translation tomorrow, most of today's volume at this now out-of-the-money strike crossed early in the session at the bid price.

With activity occurring at the bid price on the option, we can guess that these contracts are being sold, and with December options expiring at the end of the week, I would bet that many HPQ speculators are closing out these front-month positions prior to expiration; especially with the stock plunging below the strike in today's trading.

Looking at HPQ's technical outlook, it may be time for the bulls to begin to rethink their optimistic stance on the stock. Sure, HPQ has rallied more than 32 percent along its 10-week moving average since late July, but the equity has failed to convincingly breach the round-number 40 level. This rather stout region of technical resistance has held HPQ in check since November 2000, and could be teaming up with options-related resistance in the form of some rather heavy call open interest in the December and January series of options.

As far as technical support is concerned, you may have noticed in the chart above that HPQ's 20-week moving average resides in the 37.50 region. While this intermediate-term trendline certainly has the capacity to offer up a layer of support, it lays some six percent below HPQ's current perch. A pullback to this trendline is not entirely out of the question should the 10-week trendline fall.

Overall, the stock earns a Schaeffer's Equity Scorecard rating of 7.0 out of 10. In my estimation, this reading is a bit too forgiving for the shares, as it seems to be high based on the security's technical trend. When you begin to delve into the stock's sentiment backdrop, there are quite a few signs that the equity could be nearing a top.

First, with some rather heavy accumulations of calls, especially at the aforementioned December and January 40 strikes, HPQ's Schaeffer's put/call open interest ratio (SOIR) has shrunk to a reading of 0.73 in the 30th percentile. What this means is that options players have been more bearish on the stock some 70 percent of the time during the past year.

What's more, optimism of this ilk is to be expected on a technically sound stock, but when bullish sentiment becomes extreme, and the shares begin to struggle, a contrarian view may be in order.

The other two indicators that I like to look at when assessing a stock's sentiment potential lie in the short-selling and analyst communities. Briefly, short interest is practically nonexistent for HPQ, which is to be expected given the long-term technical picture for the shares.

Meanwhile, 12 of the 19 covering analysts rate the shares a "buy" or better; also not very surprising. However, what bothers me about this configuration is that HPQ has been in a sideways technical trend for some time, and pessimism has yet to creep into this backdrop.

Ultimately, HPQ could rebound solidly off technical support at its 10-week moving average and break out above long-term resistance at the 40 level, thus making all of my skepticism toward the shares irrelevant. However, there doesn't appear to be any indication of this type of skepticism among the investing public, which is why I am guessing that we will see a short- to intermediate-term decline in the shares, even if its just a quick pullback to their 20-week moving average.

As always, thank you very much for reading and good luck with your trading!

Click here to see a Weekly chart of HPQ since July 2006 with 10-week and 20-week moving averages: http://www.schaeffersresearch.com/wire?ID=17860 .

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .