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ARM Holdings Option Trader Sees More Struggles Ahead

A slew of bearish brokerage notes has one speculator rolling down his bet

by 1/16/2013 11:47 AM
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ARM Holdings plc (ADR) (NASDAQ:ARMH - 40.51) has been in a downward spiral since hitting a 12-year high of $42.55 on Monday, which has prompted one speculator to lower his near-term expectations for the stock. Just before 10:00 a.m. ET on the NASDAQ OMX PHLX (PHLX), two symmetrical blocks of 9,467 contracts simultaneously crossed the tape at the January 2013 41-strike put and the February 38 put. With the January puts trading at the bid price of $0.80, and the February puts going off at the ask price of $0.90, it appears this pessimistic player paid a net debit of $0.10 per contract to roll down his position and bet on an extended decline for ARMH through February expiration.

Widening the scope reveals option traders' discontent toward the stock has been growing of late. For starters, the equity's 10-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/PHLX put/call volume ratio of 2.46 ranks higher than 83% of other such readings taken in the past year. In other words, puts have been bought to open over calls at a faster-than-usual clip in recent weeks.

This trend is echoed in the stock's rising Schaeffer's put/call open interest ratio (SOIR). Since Dec. 24, ARMH's SOIR has grown to 1.78 from 0.85, as near-term put open interest surged 157%. What's more, this ratio ranks in the 99th percentile of its annual range, implying short-term speculators have been more put-heavy just 1% of the time within the last year.

On the charts, the equity is sporting a formidable year-over-year advance of more than 52%. However, this steady rise seems to have spooked analysts, who have hit the stock with no fewer than five downgrades and/or price-target cuts over the past three days. In fact, according to a Barron's article, these bearish brokerage notes are "based on the stock's rise in valuation and what may be overly optimistic expectations." As a result, ARMH has shed more than 4% of its value since the start of the week. Meanwhile, the stock's Relative Strength Index (RSI) reading of 62, though elevated, is not yet sounding alarms to warn of an "overbought" condition.


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