Options Volume Peaks on Plummeting Eros International

A subsidiary of the media firm was slapped with a credit rating downgrade

Eros International plc (NYSE:EROS) stock is at the bottom of the New York Stock Exchange (NYSE) today, after CARE Ratings lowered its credit rating on Eros International Media Limited, a subsidiary of the Mumbai-based movie company, to D from BBB-, citing "ongoing delays/default in debt servicing." While EROS responded, saying it and its subsidiaries "have met and continue to meet" all debt commitments, the damage is done, with the stock down 49% at $3.72, fresh off a record low of $2.82.

EROS' volatile price action has sparked heavy options trading, with 10,000 contracts traded so far -- a new annual high, and 32 times what's typically traded in a single session. The bulk of the action has occurred on the put side, and it looks like some speculators may be selling to open June 2.50 puts -- the stock's most active option today. If this is the case, put writers expect Eros International to hold above $2.50 through front-month expiration at the close on Friday, June 21.

More broadly speaking, it's been call buyers who've been busy in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 1.13 calls for each put in the past 10 sessions.

Echoing this is the security's Schaeffer's put/call open interest ratio (SOIR) of 0.45, which is ranked in the lowest annual percentile -- meaning short-term speculators are more call-skewed than usual. The June 10 call, specifically, is home to peak open interest, and data from the major options exchanges confirms buy-to-open activity here.

Considering EROS is heavily shorted -- more than one-fifth of the stock's float is dedicated to these bearish bets -- it's possible some of these out-of-the-money calls are being used as an options hedge. And while shorts are likely cheering today's big drop, they're sidelined from making any moves today, considering Eros International is on the short-sale restricted list.