Why is put volume exploding on Potash Corp. of Saskatchewan?

During the past five sessions, traders on the International Securities Exchange (ISE) have bought to open 59,544 put options on POT. By contrast, just 8,274 POT calls have been purchased on the ISE during the same time frame, placing the stock's five-day put/call ratio at a pessimistically skewed 7.20.

The equity's 10-day put/call ratio on the ISE is a notably milder 1.16. However, this ratio ranks higher than 88.1% of other such readings taken during the past year, which reveals that POT's buy-to-open option volume on this exchange has rarely been more bearishly biased.

Among near-term options, put traders have honed in on the stock's March 50 and March 80 strikes. There are 31,748 put contracts at the former strike, and another 16,958 at the latter. By way of comparison, the most popular call in this series is the 100 strike, with 22,070 contracts in open interest. With POT trading near $85, this configuration suggests that many speculative investors are looking for a sharp plunge in the stock during the short term.

The pessimistic sentiment from the options crowd stands in direct contrast with analysts -- Zacks reports that brokerage firms have awarded the shares six Strong Buys and one Buy, compared to just two lukewarm Holds. Plus, the average 12-month price target for POT is $115.16, implying an expected 35.5% upside from Wednesday's closing price.

When a stock has two such strongly opposed bullish and bearish factions on the Street, as POT currently does, it can set the stage for an explosive move in one direction or the other. Which side will capitulate first? Well, that's probably up to POT. If the stock can extend its short-term uptrend, pessimistic option players will likely be forced into backing away from their losing bets. On the other hand, a reversal of its recent rally could prompt a fresh onslaught of bearish notes from brokerage firms.

Judging by the charts, the odds look stacked in the bulls' corner during the short term. POT could potentially rally up to the century level before encountering technical resistance, because the stock's sharp plunge left the shares gapped significantly south of most major trendlines.

Of course, in today's market, nothing is certain except uncertainty itself. In order to guard against volatility and potential market headwinds, interested traders might want to hedge their bets by playing a straddle on POT shares.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.