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Splunk Inc (SPLK) Trader Targets a Rapid Retreat

Splunk Inc was the subject of a bearish debit spread options strategy

by 6/25/2014 11:07 AM
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It's been a bumpy ride for Splunk Inc (NASDAQ:SPLK) in 2014, with the shares plummeting from their Feb. 28 high of $106.15 to a June 3 low of $39.35. (In fact, the stock's one-month historical volatility stands at a steep 76.7%.) Since bottoming near the $40 level earlier this month, SPLK has rallied more than 33% to trade at $52.57 -- but one options trader is betting on an imminent free-fall for the software stock.

Shortly after today's opening bell, the speculator opened a long put spread on SPLK at the stock's July 37.50 and 32.50 strikes. Specifically, a total of 30 July 37.50 puts were bought to open at $0.10 each, while 30 July 32.50 puts were sold to open at $0.03 each -- yielding a net debit of $0.07 per spread, which is also the maximum risk on the play.

This bearish strategy will attain maximum profitability if SPLK is trading at or below $32.50 per share by the close on Friday, July 18, when front-month options are set to expire. (In other words, this spread is targeting a roughly 38% drop for Splunk Inc over the next month.) The most the trader stands to gain in this best-case scenario is equal to the difference between strikes, less net debit -- or $4.93 per spread.

Despite the stock's rebound during the past several weeks, speculators remain generally skeptical of Splunk Inc (NASDAQ:SPLK). The security's Schaeffer's put/call open interest ratio (SOIR) of 0.89 registers in the 85th annual percentile, as short-term options players have shown a greater preference for puts over calls just 15% of the time during the last year.


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