Smorgasbord of call buying in tech space
07/19/17

Traders are sifting through tech-wreck ashes, hopeful for positive quarterly results.

After all, it’s been the best-performing major sector all year. Virtually everywhere investors look – social media, smart phones, e-commerce, semiconductors, and software – they’ve found bullish stories. Throw on top of that some hefty pullbacks across the space since June and the approach of earnings, and some traders are getting giddy.

Just take Intel (NASDAQ: INTC). The chip giant announces results after the closing bell next Thursday, July 27. Options volume spiked yesterday, with a block of 18,000 4-August 35 calls bought for $0.41 and an equal number of 4-August 36.50 calls sold for $0.05. Here’s what it means:

  • Owning calls fixes the price where a security can be purchased. In this case, it’s $35.
  • Selling calls creates an obligation to deliver shares if a certain level is reached. In this case, it’s $36.50, which is also less than a dime from INTC’s peak in early June.
  • Selling calls generates income as well, reducing cost. In this case the $0.05 credit received lowered their net outlay to just $0.36.
  • If INTC closes at $36.50 or higher on expiration, the position will inflate to $1.50. That would be a 316 percent return from just a 6 percent move in the stock.

Leverage like that is key to why many traders use the strategy, known as a vertical spread. They may view INTC as an ugly duckling because of its PC-reliance in an increasingly cloud-centric world.1 But, they also may see the potential for a modest rebound with so much bad news priced in. Breakeven is at $35.36 and the position will become worthless if the shares remain below $35. INTC closed Tuesday’s session up 0.17 percent to $34.53.

Intel (INTC), 6-month chart

Source: OptionsHouse by E*TRADE.

But wait there’s more: Fiber-optic provider Ciena (NYSE: CIEN) has fared only slightly better than INTC. It gapped higher on strong earnings in June, but traders  waited for the stock to come back to earth.2 Yesterday they came off the sidelines as CIEN tested its 50-day moving average. Donning the feedbag near the start of lunch hour, buyers snarfed down 6,800 October 26 calls for $1.30 to $1.41. 

Those contracts will double from the stock climbing 15 percent to $27.60 and triple from a 20 percent move to $29.90. Breakeven is at $27.30 and they’ll go worthless if the shares remain under $26. CIEN fell 1.54 percent to $24.97. Earnings are due in late August, so those calls stand to potentially benefit from a strong report.

Internap (NASDAQ: INAP), a small-cap provider of Internet infrastructure, had a whopping 20,000 October 4 calls bought for $0.50. It reports after the bell on Aug. 3. 

There were also bullish bets in other tech names like Adobe Systems (NASDAQ: ADBE), Twilio (NYSE: TWLO), and Vishops (NYSE: VIPS) that didn’t appear linked to a catalyst like quarterly results. 

Bottom line: Tech has been coming back to life, and yesterday options traders flocked to the sector.

 

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1.  Reuters: Intel's revenue misses estimates as data center growth slows. 4/27/17. Barron's: Advanced Micro Devices: Bears ‘Denying Reality’ of Potential Against Intel, Says Rosenblatt. 6/23/17. Barron's: Intel’s Server Chips at Risk of ‘Fourth Wave’ of Computing, Says Jefferies. 7/10/17.

2. Barron's: Ciena Surges 15%: Investors Now Await ’100G’ Upgrades, Says Wells. 6/1/17.