Schaeffer's Trading Floor Blog

ARM Holdings plc (ADR) (ARMH) Option Traders Brace for an Earnings Miss

ARMH is scheduled to unveil its third-quarter earnings report next Tuesday morning

by 10/16/2013 10:44 AM
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Despite ARM Holdings plc's (ADR) (NASDAQ:ARMH) solid history in the earnings arena, options players have been accumulating long puts on the stock ahead of next week's quarterly announcement. During the course of the past 10 sessions, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 2,742 puts on ARMH, compared to 727 calls. The resultant put/call volume ratio of 2.98 -- up from its Oct. 1 reading of 0.98 -- only echoes the withstanding trend seen in ARMH's options pits.

Broadening the time frame to 10 weeks yields a 50-day put/call volume ratio of 2.65. This ratio ranks in the 81st percentile of its annual range, meaning puts have been bought to open over calls at an accelerated clip of late.

Considering ARMH will unveil its third-quarter results next Tuesday -- after October options expire -- pre-earnings put players have been targeting the back-month November 42 and 43 strikes in recent weeks. Since Sept. 23, roughly 1,250 and 1,230 contracts have respectively been added to these strikes -- the majority of which have been bought to open. Given the deep out-of-the-money status of the puts -- and ARMH's impressive 31.8% year-to-date advance -- a portion of this activity could represent investors scooping up some options-related insurance against any post-earnings downside.

If this is the case, the traders were willing to pay up for their portfolio protection. Since Oct. 1, the stock's Schaeffer's Volatility Index (SVI) has jumped to 41% from 34%, and currently ranks in the 58th percentile of its annual range, suggesting ARMH's short-term option prices are slightly elevated at the moment, from a historical perspective. More specifically, implied volatility at the November 42 and 43 puts is inflated relative to the stock's 20-day historical (realized) volatility (49%, 47% vs. 26.2%).

Elsewhere on the Street, sentiment toward ARMH is mixed. Among covering analysts, five have deemed the stock worthy of a "buy" or better rating, compared to four that have levied "hold" or worse suggestions upon ARMH. Meanwhile, although the consensus 12-month price target of $51.28 represents a slim 2.9% premium to the stock's current perch at $49.84, it also sits in uncharted territory for ARMH. However, it appears some skeptics are beginning to re-evaluate their ratings toward ARMH, as Citigroup raised its price target on the equity to 1,130 pence from 1,050 pence yesterday.

More upbeat brokerage notes could be on the horizon, should ARM Holdings plc (ADR) (NASDAQ:ARMH) notch another earnings win. The microprocessor designer has bested analysts' bottom-line estimates in each of the past eight quarters. What's more, the stock has averaged a gain of 3.5% and 3.1% in the day and week, respectively, following the release of its quarterly report. For ARMH's third quarter, Wall Street has forecast a profit of 23 cents per share -- a 5-cent improvement over its year-ago results.

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