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Option volume was higher than usual for NetApp Inc. (NASDAQ:NTAP) on Friday, particularly on the call side, where 23,000 contracts -- more than double the usual -- changed hands. Over 85% of the contracts traded during a two-legged transaction that involved NTAP's October 45 and November 47 calls. However, this activity wasn't of the typical bullish variety.
Digging deeper, we notice one 9,800-lot of the lower-strike calls traded near the ask price at $0.24 each, suggesting they were purchased. Over the weekend, however, open interest fell precipitously, which indicates the block was bought to close. At the same time, a 9,800-lot of November 47 calls crossed at the bid price of $0.45 each, and open interest spiked, hinting at the creation of new short positions. What's more, data from the International Securities Exchange (ISE) confirms this activity. To sum it up, Friday's big trader rolled his previous short call bet up and out, in the expectation that NetApp shares will not trade above $47 during the back-month option's lifetime.
Assuming NTAP shares are still trading south of $47 when the newly sold options expire, the call seller will keep the entire premium collected as profit as the calls expire worthless. NTAP is currently hovering at $42.51, so this individual has roughly 10.5% of wiggle room before his profit is in danger. However, if the stock rises above the strike price prior to the closing bell on Nov. 15, the trader risks assignment, which would force him to deliver the shares at $47 each no matter how high they're trading, for potentially unlimited losses. If the calls are tied to an existing stock position, or "covered," he would simply unload his stock position to fulfill the obligation of the short call.
Looking back, NetApp Inc. (NASDAQ:NTAP) hasn't come close to the strike price since April 2012, when the stock hit $46.80. Nevertheless, the shares are currently in rally mode, up over 26% year-to-date, and outperforming the broader S&P 500 Index (SPX) during the past 60 sessions. What's more, the data management company continues to find support at its 40-day moving average, which hasn't been breached on a daily closing basis since May 2.
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