Schaeffer's Trading Floor Blog

Can Brocade Extend Its Recent Uptrend?

BRCD's October 7 calls have been extremely popular lately

by 8/31/2012 10:10 AM
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The shares of Brocade Communications Systems, Inc.. (NASDAQ:BRCD - 5.76) saw a wave of call activity on Thursday. During the course of the session, the equity saw 6,362 calls change hands, accounting for more than double its average daily call volume, and more than 34 times the number of puts traded.

Speculators initiated new positions at the out-of-the-money October 7 call, which saw open interest increase by 4,634 contracts overnight. One-hundred percent of these calls changed hands at the ask price, which points to buyer-driven volume. By purchasing these calls to open, traders believe that BRCD will climb above $7 by October expiration, which has occurred only once on a weekly closing basis since January 2010.

Thursday's affinity for short calls mirrors the largely bullish trend seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where BRCD sports a 10-day call/put volume ratio of 39.95. In other words, options traders have bought to open almost 40 calls for every put during the past couple of weeks. Plus, this ratio ranks in the 76th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets over bearish.

Similarly, the Schaeffer's put/call open interest ratio (SOIR) for BRCD checks in at 0.13, conveying that calls easily outnumber puts among options expiring within three months. This ratio registers one percentage point away from its annual low, suggesting that near-term options players have been more call-heavy toward the stock just 1% of the time during the last 12 months.

Elsewhere on the Street, it appears that short traders have been rethinking their bearish bets on the telecom issue, as short interest decreased 4.4% during the most recent reporting period. In fact, at BRCD's average pace of trading, it would take roughly two sessions for all of the remaining pessimistic positions to unwind.

On the charts, BRCD is up about 50.8% for the past 52 weeks, and a healthy 11% in 2012. Just after the opening bell, the shares are wavering around breakeven in the $5.70-$5.80 region -- which has acted as technical backstop for nearly two weeks.

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