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Mellanox Technologies Traders Target More Downside

MLNX skeptics are scooping up short-term puts

by 1/3/2013 12:35 PM
Stocks quoted in this article:

Put players are pummeling Mellanox Technologies, Ltd. (NASDAQ:MLNX 52.99) today, with intraday put volume skyrocketing to eight times the norm. So far, the semiconductor concern has seen roughly 21,000 puts change hands, compared to its average midday volume of fewer than 2,500 puts. On the flip side, fewer than 8,600 MLNX calls have crossed the tape.

Jumping right in, speculators are picking up January 2013 50-strike puts, which have seen more than 2,800 contracts traded on open interest of fewer than 2,400 contracts, pointing to new positions. Plus, nearly two-thirds of the front-month puts have crossed at the ask price, suggesting they were bought.

By purchasing the puts to open, the buyers are expecting MLNX to extend today's retreat and breach the $50 level within the next couple of weeks. More specifically, the puts traded at a volume-weighted average price (VWAP) of $2.50, indicating a breakeven level of $47.50 (strike minus premium paid) for the buyers. However, even if MLNX stays north of the mid-century mark, the most the speculators stand to lose is the initial premium paid for the puts.

Even before today's guidance-related plunge, options traders were growing wary of MLNX. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), investors have bought to open nearly twice as many MLNX puts as calls during the past two weeks. Plus, the stock's 10-day put/call volume ratio of 1.90 ranks in the 80th percentile of its annual range, suggesting option buyers have initiated pessimistic positions at a faster-than-usual pace.

Echoing that, the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.33 indicates that puts outnumber calls among options with a shelf-life of three months or less. What's more, this ratio sits just 9 percentage points from a 52-week peak, implying that near-term traders have rarely been more put-heavy during the past year.

At last look, MLNX has shed 13.4% to hover just shy of the $53 level. Pressuring the shares was the company's downwardly revised fourth-quarter revenue estimates, with MLNX now anticipating sales of $119 million to $121 million, compared to previous guidance for $145 million to $150 million. The firm cited a technical issue with its FDR InfiniBand cabling, which postponed roughly $20 million of deployments in the recently concluded quarter.


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