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Rallying SanDisk is Swarmed by Options Traders

But some of SNDK's put players may be hitting the exits on their pessimistic positions

by 9/6/2012 1:04 PM
Stocks quoted in this article:

The shares of SanDisk Corporation (NASDAQ:SNDK - 43.98) have jumped more than 8% today, after solid-state drive manufacturer OCZ Technology Group Inc. (NASDAQ:OCZ) warned of a component shortage. Even so, that hasn't stopped put players from converging on SNDK shares. Roughly 18,000 puts have crossed the tape so far, which is seven times the equity's expected intraday volume.

Garnering the most attention is the out-of-the-money October 38 strike, where around 2,900 puts have changed hands -- most of them between the ask and bid, making it difficult to discern whether they were bought or sold. Also, because this option is already home to open interest of 5,606 contracts, it cannot yet be determined if new positions are being added here today. However, given today's surge, it's possible that some of these traders are sprinting toward the exits, as the stock would have to sink nearly 16% by October expiration for them to break even, let alone collect a profit.

Turning to other popular strikes, it appears a block of 1,300 puts was sold at the January 2013 40 strike for $2.50 per contract, while an equal number of calls were simultaneously sold at the January 2013 44 strike for $3.90 apiece -- resulting in a net credit of $6.40. This activity suggests that one trader may have initiated a short strangle on SNDK. Essentially, the speculator is counting on the equity to close between the strike prices by January expiration -- rendering both options worthless, and allowing him to pocket the net credit received. If the stock goes down, his risk is capped at $33.60 (put strike minus net credit). However, if the stock rises, his losses are, theoretically, unlimited.

Today's put activity aside, calls bought to open seem to have the upper hand, as reflected by SNDK's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 2.12. In other words, calls bought to open have more than doubled puts during the past two weeks. This ratio ranks in the bullishly skewed 71st annual percentile, conveying that traders have been picking up calls over puts at a faster-than-usual pace.

In a similar vein, the Schaeffer's put/call open interest ratio (SOIR) for SNDK checks in at 0.80, confirming that calls outpace puts among the front three-months' series of options. This ratio arrives in the 27th percentile of its annual range, meaning near-term traders have been more optimistically aligned toward the stock just over one-fourth of the time during the past year.

Elsewhere, most of the analysts covering the data storage provider seem to hold SNDK in high regard. Currently, the security sports 11 "strong buys" and four "buy" recommendations, compared to eight "holds" and one "sell" suggestion. However, Thomson Reuters shows an average 12-month price target of $44.80 for the stock, which is just a stone's throw away from its current perch at $43.98. This leaves some wiggle room for future price-target hikes, which could provide a tailwind for the equity.

From a technical perspective, SNDK has shed close to 11% year-to-date, but has added nearly 8% on a year-over-year basis. The equity has also outperformed the broader S&P 500 Index (SPX) by north of 14 percentage points during the past two months. Although today's spike puts the stock on pace to close the week atop its 40-week moving average for the first time since late March, SNDK still hovers just below the $44 mark -- a level not surmounted since early April. Only time will tell if the security has enough momentum to extend today's climb beyond a single-session rally.


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