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Put Traders Pile On as Align Technology Sinks

Buy-to-open put volume ramps up following ALGN's post-earnings plunge

by 10/18/2012 12:50 PM
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Option players have displayed a penchant for Align Technology, Inc. (NASDAQ:ALGN - 27.02) puts over the last month. Specifically, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 119 puts for every 100 calls throughout the past 20 sessions.

Even more telling is ALGN's put-skewed Schaeffer's put/call open interest ratio (SOIR) of 1.82. Not only does this ratio show put open interest nearly doubles call open interest among options expiring in three months, but it ranks in the 71st percentile of its annual range, indicating short-term speculators are more put-heavy than usual toward ALGN.

Today's post-earnings plunge isn't doing much to change this recent trend. Roughly 12,000 put contracts have changed hands, representing more than 14 times the average intraday put volume. By comparison, fewer than 5,600 call contracts have crossed the tape.

Speculators have shown particular interest in the October 26- and November 25-strike puts, which have seen around 1,250 and 2,100 contracts trade, respectively. The majority of contracts at each strike have crossed at the ask price, and volume is easily outstripping open interest, making it safe to assume that new positions are being initiated today.

By buying the October 26-strike put to open, traders expect ALGN to finish below $25.66 (the strike minus the volume-weighted average price [VWAP] of $0.34) by tomorrow's close (when these options expire). Meanwhile, the purchasers of the further-dated November 25-strike put will profit with each step south of $23.96 (the strike minus the VWAP of $1.04) through November expiration. These breakeven levels represent a respective 5.3% and 12.8% drop from the stock's current perch.

As touched upon, ALGN has shed almost 24% today, after the company gave a dismal fourth-quarter outlook. Additionally, ALGN announced the possibility of a goodwill impairment tied to the termination of its distribution agreement with Swiss-based Straumann Holding AG. Heading into today's session, though, ALGN was sporting an impressive return of 49.3% in 2012. This year-to-date gain has now dropped to around 13.9%, and the stock is in danger of logging its first daily close south of its 200-day moving average since Oct. 27, 2011.

Additional headwinds may be in store for ALGN in the near term. The stock was hit with two bearish brokerage notes this morning from the likes of JMP Securities and Cantor Fitzgerald. With eight out of 11 analysts maintaining a "strong buy" suggestion for the equity, and the average 12-month price target of $38.45 representing a 42.3% premium to ALGN's current price, the door is wide open for an additional round of downgrades and/or price-target cuts.


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