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Rackspace Hosting, Inc. (RAX) Lures April Bulls to the Options Pits

RAX traders pick up near-term calls, despite sluggish price action

by 3/15/2013 2:25 PM
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Rackspace Hosting, Inc. (NYSE:RAX - 51.20) has seen a surge in bullish options activity today, as approximately 14,000 calls have crossed the tape so far. This is more than four times the security's expected intraday call volume, and 1.68 times the number of puts exchanged. Garnering notable attention has been the April 55 call, where more than 5,600 contracts have traded at a volume-weighted average price (VWAP) of $0.84.

Upon closer inspection, it appears that several large blocks changed hands at the ask price, suggesting they were purchased. Because today's volume outstrips current open interest levels -- coupled with the fact that implied volatility has climbed almost 4 percentage points during the course of the session -- it can be assumed that new positions are being established here. Essentially, these bullish bettors are expecting the stock to ascend past the $55.84 level (strike price plus the VWAP) by the closing bell on April 19, when these soon-to-be front-month options expire. This is a 9% increase from RAX's present perch.

However, this penchant for calls over puts is simply more of the same for the cloud computing firm. Traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open more than two calls for every put during the last two weeks. The resultant 10-day call/put volume ratio of 2.11 registers higher than 77% of similar annual readings, indicating speculators have been picking up calls over puts at an accelerated pace.

Likewise, RAX's Schaeffer's put/call open interest ratio (SOIR) sits at 0.68, with calls easily outnumbering puts among options expiring within the next three months. This ratio ranks in the 22nd percentile of its annual range, conveying near-term traders have been more call-heavy toward the stock less than one-fourth of the time during the last 12 months.

RAX hasn't fared too well on the charts lately, given its year-to-date decline of more than 31%, as well as its year-over-year loss of about 10%. What's more, the equity has shed about 37% since tagging a record high of $81.36 on Jan. 24. Nevertheless, even if the stock fails to meet the expectations of today's bulls, the most they stand to lose is the initial premium paid.


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