Amidst Monday’s bearish market shrapnel, erstwhile growth story and technically speaking, deeply-entombed Acme Packet (APKT), a provider of delivery network solutions, saw some interesting opening action in its January 2013 calls and puts which suggest a ratio risk reversal or fence was established.
Placed about 15 minutes apart according to our print sniffing, a block of 2,514 January 22.5 calls and 4,000 January 14 puts appear to be part of a package as nonexistent open interest and prices of $2.20 and $1.35 allow a trader using a combo of either buying the calls and selling the puts or vice versa, to establish a ratio fence or ratio risk reversal for fairly close to even money. Of course, “close” is a relative term, but for a trade of this magnitude it certainly is.
The risk reversal is a directional oriented position which above and below the executed strikes, acts like stock at expiration while capturing the initiating credit or losing the “small” debit if shares wind up between the call and put. It should be stressed that prior to expiration, delta risk for both the long call / short put bull and the long put / short call bear exists on paper in-between the strikes and can be quite substantial if shares begin moving systematically lower or higher from the initiated levels.
We don’t have the inside skinny on whether today’s positioning was put together by a bull or bear, though a ravenous coyote seems to fit the billing. We do know stock doesn’t look to be involved as part of a package deal. However, that doesn’t prevent an existing position from being hedged with today’s contracts and what we’d then label as a ratio collar.
Figure 1: Acme Packet (APKT) “Bull View” Ratio Risk Reversal
Personally and not intended as a recommendation, from the standpoint of the ratio reversal position, we’d give the benefit of the doubt to a bull buying the calls and selling the puts. The risks for either of these essentially open-ended positions are high, with the bullish side facing net long exposure of 400,000 shares below the 14 strike, while the bear would be net short 250,000 shares above 22.50. But positioning of the strikes is such that a purchased call is only 14% out-of-the-money compared to the puts which are roughly 30% below APKT as it trades near 19.60. Thus, the calls are much closer to being physically or intrinsically worth something.
Further APKT shares have experienced a disastrous implosion of nearly 70% in share price over the past 13 to 14 months. The kind of good news is this sort of technical punishment is also a common occurrence for most growth stocks which typically fail at some point to live up to the initial hype. That said, the end of the road in a good sort of way, could be near. As much, we can’t help but see that other long-standing and comical trend of Wile E. always crashing, as one which deserves a technical break and allows our protagonist to enjoy some nice financial fireworks for once in a long, long time.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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