Naz’ 100 (QQQ) constituent NetApp (NTAP), a provider of networked data storage solutions, received a downgrade Monday from boutique research outfit ThinkEquity. In front of Wednesday night’s earnings report the shop cut shares to “Hold” and slashed its price target from $54 to $42. Analyst Rajeesh Ghai cited a “cooler-than-anticipated reception to the company’s new ONTAP 8.1 storage product” is unlikely to provide the company with the growth catalyst ThinkEquity previously forecasted.
With shares of NTAP bucking Monday’s broad-based relief bid with a dip of 1.79% and the stock signaling a technical break of both 10SMA and our own recent prognosis of a bullish handle developing and discussed in last week’s Market Barometer column, option traders were busy in the puts by a strong 2-to-1 margin on heavy overall volume of 84,000 contracts compared to an average day’s tally of 13,000.
Most active on fairly even volume of 18,500 and 19,100 and trading which easily topped existing open interest in both strikes were the newly-appointed at-the-money February 39 put and still well-out-of-the-money February 34 put. With NetApp offering one point wide strikes, the five point distance and much lower but still heavy volume totals in the strikes wedged between suggests to us at least, traders were collectively trading the put vertical "to open."
Bull or Bear? There are two sides to every trade including our hypothesized vertical. With premiums pumping higher into the mid-100s in front of the release it would also be easy enough to see the bear vertical as driving the potential order flow. A bear vertical's purchased, at-the-money contract maintains nearly double the Vega (albeit dwindling) of the 34 put which would be used as a sale to finance part of the position's debit.
Figure 1: NetApp (NTAP) Weekly EW4 Buy Set Up
On the other hand, looking at the closing put values of $2.19 and $0.41, given the roughly 20% savings in buying a put spread versus outright ownership of the 39 put; we’re inclined to be more a fan of selling the vertical with the OTM serving as protection during an extreme, larger than expected earnings gap.
As of last night, the expected move based on 133% ATM IV and four days remaining works out to option prices suggesting a 68% chance of NTAP remaining within a 14% range from Monday’s close of 39 or between 33.50 and 44.50 through expiration. Given the lower outcome for shares and a level which would find the spread expanding to its max width of 5 points; it’s all the more reason to see its use as one benefiting any would-be bulls still with their eye on the upside prize, price stabilization or maybe a wrinkle on a collar entry if we’re to believe in Elliott’s longer-term and still intact prognostications as shown in Figure 1.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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