Option Player Optimism on Ericsson Shows Signs of Rising

The shares of Ericsson (ERIC: sentiment, chart, options) are trading more than 1% higher this afternoon following a mix of reports from the company and Wall Street. Before the open this morning, the telecommunications giant announced that it has agreed to divest its TEMS-branded products business, consisting of tools for air interface monitoring and radio network planning, to Ascom. The agreement involves the transfer of about 300 employees, of which around 180 are based in Sweden. The transaction is expected to close in June 2009.

With the divestment, ERIC is refining its leading Professional Services portfolio to focus more purely on the service business. Ericsson believes that this transaction will allow the TEMS business to further realize its growth potential, while Ascom gains significant competence, well-known and industry-leading products, and a sizable customer base.

It's been a busy week for Sony Ericsson Mobile Communications, the equally owned venture between Sony and Ericsson. On Friday, the company issued a profit warning. Today, it said that its president of Sony Ericsson USA and Head of Region North America, Najmi Jarwala, will leave at the end of March to pursue other career opportunities. In the interim, Anders Runevad, Executive Vice President of Sony Ericsson and Head of Global Sales & Marketing, will take on the responsibilities. The company will announce a replacement "in due course."

Also attempting to cast a dark cloud over the stock today is a downgrade from Royal Bank of Scotland. The brokerage firm lowered the shares from "buy" to "sell," citing the issues at Sony Ericsson that led to Friday's warning from the mobile operator. The broker said it doesn't see how Sony Ericsson can be fixed quickly, noting its lack of a major presence in the smartphone market, a disproportionate share in the collapsing European market, and the lack of a proprietary operating system. The history of troubled phone makers doesn't bode well, it added, citing the rapid market share declines of Motorola (MOT) and the now-bankrupt former Siemens' phone arm.

The overall mood on Wall Street toward the telecommunications firm is extremely pessimistic. Zacks reports that the company has earned 1 "strong buy," 6 "holds," and 5 "sells." While this configuration leaves ample room for potential upgrades, the company first needs to present the Street with some positive news. Until the company can produce some positive results, it's unlikely the security will receive a boost from this group any time soon.

Furthermore, the average 12-month price target for ERIC stands at $8.68, according to Thomson Reuters. This estimate implies that analysts expect the stock to rally only 4.5% during the next 12 months, showing that expectations remain relatively low for the shares.

Options players are just as skeptical of the shares as analysts. The Schaeffer's put/call open interest ratio for ERIC stands at 1.41, as put open interest outnumbers call open interest among near-term options. This reading is also higher than 72% of all those taken during the past 52 weeks, indicating that short-term options players have been more skeptical of the firm just 28% of the time.

Digging into the stock's open interest configuration, we find that peak April put open interest sits at the 7.50 strike, with more than 14,500 contracts in residence. The April 10 put is close behind, with open interest of nearly 9,600 contracts.

On the other hand, peak April call open interest resides at the 12.50 strike, with 10,800 contracts. The April 7.50 call is next in line, with open interest of 8,350 contracts. This preference for put contracts over call contracts indicates that investors are expecting the shares to head lower during the near term.

However, we could be seeing the beginning of a shift in sentiment among options players, as traders are flocking to the stock's calls today. The April 7.50 call has seen more than 6,800 contracts cross the tape today, while put trading is practically nonexistent.

Furthermore, the International Securities Exchange (ISE) has seen an increase in call trading recently. During the past 10 trading sessions, 2.2 calls have been purchased to open for every 1 put purchased to open. This ratio of calls to puts is higher than 74.6% of all the readings taken during the past year, pointing to a growing optimism among options players.

Technically speaking, the shares have been trending higher from their November low, creating a series of higher lows as they have gained more than 51% in value. The stock is still facing staunch resistance in the form of the 9 level, which has capped the stock's rally attempts since mid-February. The 9 level is also home to the security's declining 10-month moving average. This long-term trendline has guided the shares lower since October 2007.

Traders should keep a close watch on resistance at the 9 level. If the stock can finally punch through this resistance zone and trek higher, it could send many of the bears scrambling for cover, causing a fresh wave of buying pressure for the shares.

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