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JDS Uniphase Could Face Options-Related Headwinds

Will a glut of near-the-money calls cap the stock's short-term progress?

by 5/16/2012 11:25:52 AM
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JDS Uniphase Corporation (JDSU - 10.75) has been a technical laggard on the charts during the previous 12 months, losing nearly half of its value in that time. In addition, over the course of the past 60 trading sessions, JDSU has underperformed the broader S&P 500 Index (SPX) by 27 percentage points, on a relative-strength basis. More recently, the stock has wallowed south of its 10-day moving -- a trendline that has shuttled the equity lower since early April.

Daily Chart of JDSU since April 2011 with 10-Day Moving Average

In light of JDSU's technical difficulties, options players are ramping up their bearish exposure toward the stock, as evidenced by data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The stock's 10-day put/call volume ratio sits at 0.71, in the 85th percentile of its annual range.

However, there's still plenty of room on the bearish bandwagon. Since May 1, JDSU's Schaeffer's put/call open interest ratio (SOIR) has backpedaled to 0.49 from 0.54, as short-term call open interest has increased 17%. This ratio arrives in the 8th percentile of its annual range, implying that near-term traders are still more call-heavy than usual toward the stock.

In the short term, JDSU may find itself churning below the $12-$13 mark -- home to peak call open interest in the May series -- with the stock's front-month gamma-weighted SOIR docked at a call-heavy 0.69. In other words, near-the-money call open interest outweighs put open interest in the soon-to-expire May-dated series of options. This collection of calls could translate into options-related resistance for the equity, as the hedges related to these bets begin to unwind.

At last check, JDSU has tacked on 1.9% to hover around $10.75.

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