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Rackspace Hosting Traders Predict a Downturn

Speculators scoop up RAX's December-dated puts

by 10/15/2012 9:46 AM
Stocks quoted in this article:

Bearish options activity ramped up on Rackspace Hosting, Inc. (NYSE:RAX - 67.23) on Friday, despite the stock receiving upward price-target adjustments at RBC and JMP earlier in the week. By the time the closing bell rang, over 4,600 puts had changed hands, more than tripling the equity's average daily volume. Conversely, fewer than 1,100 calls were traded.

Most active was the December 70 strike, where nearly 3,000 puts crossed the tape -- almost all of them at the ask price, suggesting they were bought. These in-the-money contracts were exchanged at a volume-weighted average price (VWAP) of $6.15. Meanwhile, open interest at this strike rose by 2,521 contracts over the weekend, underscoring our theory of new positions. By purchasing these puts to open, speculators are expecting the stock fall below $63.85 (strike price minus VWAP) by December expiration.

This fondness for bearish bets over bullish is hardly unusual for RAX. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio sits at 5.80, indicating puts bought to open have outstripped calls by a margin of almost six to one during the past couple of weeks. This ratio registers higher than 90% of other such readings taken during the past year, meaning speculators have been snapping up puts over calls at a much faster-than-usual pace.

In a similarly pessimistic vein, RAX's Schaeffer's put/call open interest ratio (SOIR) checks in at 1.77, with puts nearly doubling calls among options with a shelf life of three months or less. This ratio ranks in the 87th percentile of its annual range, signaling that near-term traders have been more put-heavy toward the equity just 13% of the time during the past year.

Meanwhile, although short interest on the cloud-computing firm edged about 2% lower during the past month, these bearish bets still make up more than 11% of RAX's available float. It would take close to seven days to unwind these shorted shares, at the stock's average daily trading volume.

Sentiment is just slightly more positive among the brokerage bunch, with RAX sporting nine "buy" or better recommendations, compared to eight tepid "hold" ratings. However, even with the aforementioned price-target hikes, Thomson Reuters still shows an average 12-month price target of $64.07 for the security -- representing a discount to Friday's closing price of $67.27.

This bounty of pessimism toward RAX seems unfounded, considering the equity boasts a year-over-year advance of about 68%, as well as a year-to-date gain of more than 56%. The security has also outpaced the broader S&P 500 Index (SPX) by around 46 percentage points during the past three months. On the charts, the stock continues to trade atop its 20-day moving average, which, along with its 10-day cohort, has served primarily as support since July. Furthermore, RAX claimed a new record high of $69.81 on Oct. 5. A continuation of this technical strength in the near term could cause Friday's bears to rethink their put positions.

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