Puts Popular Ahead of Earnings from Hovnanian Enterprises

This ratio of puts to calls ranks higher than 97% of other such readings taken during the previous year, suggesting that speculators on the ISE have rarely purchased puts over calls at a faster clip.

In the front-month series, peak put open interest consists of 2,098 contracts at the September 3 strike. With HOV lingering near $3.50 at last check, this skew toward an out-of-the-money put strike suggests that short-term options traders are expecting the stock to slide significantly prior to expiration.

Short sellers have also placed substantial bets against HOV. Short interest accounts for 36.7% of the equity's float, which translates to roughly 11 days' worth of pent-up buying pressure at HOV's average daily trading volume.

Analysts are emphatically bearish, as well. Zacks reports that Hovnanian has racked up just one strong buy rating, compared to two holds and seven strong sells. Meanwhile, the shares are already trading fractionally above their average 12-month price target of $3.50, as calculated by Thomson Reuters.

This strongly negative sentiment isn't exactly surprising, considering the well-known fundamental woes that continue to plague the housing sector. Plus, HOV is floundering on the charts -- since early May, the shares have skidded lower beneath resistance at their 10-week and 50-week moving averages.

On the other hand, the equity is currently rebounding from support at $3.40, which has provided a solid floor for the shares in 2010. The stock's Relative Strength Index (RSI) of 35 is on the border of oversold territory, too, suggesting that HOV may be due for a short-term rally.

Given the company's spotty track record on the earnings front, it's difficult to be out-and-out bullish on Hovnanian ahead of earnings. However, the combination of solid technical support and heavy-handed pessimism could indicate that selling pressure is temporarily exhausted. If the homebuilder can manage to produce anything resembling good news in tonight's quarterly report, there's plenty of room for a post-earnings pop as the weaker bearish hands hit the exits.

Elizabeth Harrow is a senior equities 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.