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As Rackspace Hosting, Inc. (NYSE:RAX - 66.35) prepares to report third-quarter earnings after today's close, put players have been coming out of the woodwork. More than 9,100 of these options have changed hands so far, or five times the equity's expected intraday put volume. By comparison, fewer than 3,200 calls have been traded.
Today's front-runner has been the November 60 strike, where more than 3,300 puts have been exchanged -- about half of them at the ask price, signaling they were bought. These out-of-the-money contracts crossed at a volume-weighted average price (VWAP) of $1.27. Because this strike currently holds open interest of about 7,000 contracts, it cannot be said with certainty whether new positions are being added here. However, implied volatility was last seen more than 12 percentage points higher, hinting at the possibility of freshly established bets. If these puts were, in fact, bought to open, speculators are expecting the stock to retreat below $58.73 (strike price minus VWAP) by Nov. 16, which is when front-month options expire.
This penchant for puts over calls is hardly unusual for RAX, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the equity's 10-day put/call volume ratio stands at 12.66, confirming traders have bought to open more than a dozen puts for every call during the last couple of weeks. This ratio is just seven percentage points shy of a bearish peak, meaning traders have rarely snapped up puts over calls at a faster pace over the past year.
As a result, Schaeffer's put/call open interest ratio (SOIR) checks in at 1.54, signaling puts comfortably outstrip calls among options scheduled to expire in the next three months. This ratio is docked in the 78th percentile of its annual range, signaling near-term traders are more put-heavy toward the stock than usual.
Meanwhile, just over half of the brokerage firms have deemed the cloud computing firm worthy of a bullish recommendation. Specifically, RAX sports eight "strong buys" and one "buy" endorsement, compared to eight "holds" and zero "sells." Even more telling is the fact that the equity's average 12-month price target sits at $64.07, reflecting a discount to Monday's closing price of $66.11.
This pessimism hovering over RAX seems unfounded, as the stock has advanced more than 58% on a year-over-year basis, and has outpaced the broader S&P 500 Index (SPX) by north of 22 percentage points during the past three months. A look at the charts shows that the stock regained footing atop its 10-day moving average late last week, which had previously acted as resistance during the two weeks prior.
However, as previously noted, RAX is scheduled to step up to the earnings plate after closing bell, and has fallen short of analysts' bottom-line projections in both of the last two quarters. Today's potential bears may be counting on another earnings miss, which could pressure the security lower. Even so, the shares will need to shed nearly 13% from their current perch over the next two weeks in order for today's aforementioned traders to realize a profit on their put positions.