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Roll Up Fuels Marvell Technology Group Ltd.'s (MRVL) Call Volume Spike

A single block trade had calls solidly outpacing puts yesterday

by 5/2/2013 10:31 AM
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Marvell Technology Group Ltd. (NASDAQ:MRVL) saw an unusual amount of option activity yesterday. In particular, bullish bets seemed to be in vogue, with about 19,000 call options traded -- that's nearly five times the expected daily call volume, and roughly six times the number of puts exchanged.

The at-the-money May 11 call was where much of the action took place, with over 8,200 option contracts crossing the tape. The lion's share of these transactions occurred during the execution of what appeared to be a roll up, during which a single trader simultaneously sells to close and buys to open two blocks of calls at different strike prices.

In this case, the investor sold 4,675 in-the-money May 9 calls when MRVL was priced near $10.90, to collect $1.90 per option contract. He then used a portion of the profits to buy 7,000 May 11 calls at the ask price of $0.35. An decrease and increase in implied volatility, as well as open interest overnight, followed at both strike prices, corroborating our theory that the trader was rolling up his bullish bet.

The investor is now looking for Marvell Technology Group to make the 4.1% jump from Wednesday's closing price of $10.90, to the breakeven point of $11.35 (strike price plus net debit), prior to the May 17 expiration date. Gains past that point will accrue penny-for-penny with the underlying stock's rise, while losses are capped at the initial premium paid.

From a broader sentiment perspective, yesterday's bullish bettor stands apart from the crowd. Over the course of the past 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the put/call volume ratio on MRVL is 1.77 -- or roughly two puts purchased for every call. That figure lands in the 97th percentile of readings taken in the last year, meaning that investors have rarely been as put-focused as they are now.

The same is true among the brokerage bunch. Marvell Technology Group sports just seven "buy" or better ratings, compared to 16 "holds" or worse.

Such extreme levels of bearishness are surprising, considering the underlying security's technical strength. Year-to-date, MRVL has picked up over 50%, and has outpaced the S&P 500 Index (SPX) by nearly 40 percentage points, easily making up for the losses it suffered in 2012. Should such strong price action continue, a series of analyst upgrades and/or revisions to the stock's 12-month price target -- currently averaging $10.63 -- could push Marvell Technology Group Ltd. (NASDAQ:MRVL ) even further north.


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