Shares of Automatic Data Processing (NASDAQ:ADP) gapped higher in late July, on rumors Bill Ackman's Pershing Square Capital Management was buying a stake in the payrolls specialist. ADP stock went on to hit a record high of $121.77 on July 31. And while the security has since retreated alongside a significant drop in short interest, ADP options traders have been raising the bearish stakes.
Since topping out at their all-time peak, ADP shares are down 12%. The security gapped lower in mid-August after Ackman reiterated that Pershing's proposed shake-up of the company would likely involve the removal of CEO Carlos Rodriguez, though ADP issued a statement saying it "strongly disagree[s] with many of the assertions made by Mr. Ackman." While ADP found support in the $102 region, it has yet to fill its Aug. 17 bear gap, last seen trading at $106.87.
What's interesting is that the stock's retreat from record highs came amid a steady stream of short covering. Specifically, 10.52 million ADP shares are currently sold short -- a 27.7% drop from the 14.56 million shares in the Aug. 1 reporting period, an eight-year peak. In the latest reporting period alone, short interest fell 22%, or $376.31 million in dollar-value changes, according to Schaeffer's Quantitative Analyst Chris Prybal -- the most of any stock during this time frame. The stock's inability to capitalize on this influx of buying power could point to underlying weakness.
Options traders, on the other hand, have preferred long puts over calls in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 35,566 puts in the past 50 sessions, compared to 20,035 calls.
Drilling down, peak open interest of 13,244 contracts is found at the November 100 put, and data from the major options exchanges confirms buy-to-open activity here. In other words, options traders are betting on ADP breaching the round $100 mark by expiration at the close on Friday, Nov. 17 -- a time frame that includes Automatic Data Processing's Oct. 31 quarterly earnings report and Nov. 7 annual shareholders meeting. With ADP stock still up 22% year-over-year, this activity could be a result of investors hedging against any additional downside risk.