NASDAQ 100 constituent and network storage / cloud outfit NetApp (NTAP) reports after the close Wednesday night. Of notice in front of its report, shares have traded lower by about 12% and been under modest relative pressure since Cisco (CSCO) warned on its outlook two weeks back on May 10.

The most recent analyst call spied just prior to Cisco and with shares trading near 38 on May 7 was made by analysts at Pacific Crest. That day NetApp was reiterated with an “Outperform” rating due to anticipated improving fundamentals and the possibility shares could see $50 with significant downside risk “unlikely.” We’re unsure if current levels near 33 count as “unlikely” for Pacific Crest.

The Number

NetApp is expected to produce earnings of $0.49 per share and an improvement of two cents or growth of 4.3% over its year ago results when it reports its Q4 results. At the same time, sales are forecasted to grow by 12% from $1.51B to $1.69B.

Figure 1: NetApp (NTAP) Past Top & Bottom Line Data

Trader reaction to the past four reports and working backwards from FY11Q3 are consistent in that decent size gaps have been a hallmark of the post earnings action with closing one day moves of 7.17%, -12.3%, -14.05% and 6.92% in the immediate aftermath.

The Chart

Figure 2: NetApp (NTAP) Weekly Chart

For traders looking to the technical tea leaves for clues, the weekly chart of NTAP suggests shares are at one of those critical areas defined by prior triple bottom support that’s also sandwiched between key retracement levels dating back from its 2009 lows. As much, our interpretation is rather than seeing either bulls or bears being favored going into the earnings event; instead, we’d expect another one of NTAP’s common gaps to continue that historical trend.

Option Activity

In Tuesday’s session, calls outpaced puts by a healthy 2.5-to-1.0 margin on overall volume of 36,000 contracts. Of notice, the near-the-money June 34 call closed mid-market at $1.90 on volume of 7,900. Compared to open interest of 3,400, the action suggests the opening of positions. And with premiums well-bid into the earnings event on implieds near 65%, buyers, though at risk of an estimated 40% - 50% volatility crush, appear to be behind today’s order flow with the largest print 2,000 contracts for $2.18. On an expiration basis, a double would require a move of roughly 13.5%.

The Weeklys May contract saw the session’s largest single prints as one trader looks to have put up a 1 x 2 spread using the 34 and 37 call. Simultaneous prints of 3,000 and 6,000 for $1.65 and $0.65 with much lighter existing open interest tell us a ratio spread was initiated for $0.35 with the credit going to the backspread position which is short the May 34 call and long twice as many 37s.

Figure 3: NetApp (NTAP) Weeklys Long Butterfly

With the Weeklys expiring Friday, theta and implieds juiced near 150% essentially mean a backspread position will need NTAP to see well above normal upside for this earning report as its breakeven of 39.65 is a full 19% above today’s close and well above any of the fore-mentioned gap reactions of the past year.

If shares were to stand pat or south of the sold 34 strike, the trader of course would keep his or her token $0.35 or a less trivial $70,000. That all said, we can’t help but like the other side’s position which is called a ratio frontspread. However, for an extra $0.18 to $0.20 out-of-pocket and for a grand total of $0.50, we also like the more secure peace of mind afforded by a regular 3 point Weekly May 34 / 37 / 40 long butterfly like the 4 lot illustrated above. Just in case history decides to outdo itself and a priced-in expected move of about 13% - 16% based on May and June ATM implieds proves too conservative; it's nice to know what one's pinch to the bottom-line would be.  


Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.