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Texas Instruments Inc. Traders Turn Bearish Ahead of Earnings

Texas Instruments Inc. puts are trading at four times the typical pace today

by 7/14/2014 2:55 PM
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Puts are trading at four times the intraday average in Texas Instruments Inc.'s (NASDAQ:TXN) options pits today, and are outpacing calls by a more than 3-to-1 margin. Short-term contracts are in high demand, as evidenced by the equity's 30-day at-the-money implied volatility, which has popped 4.4% to 19.1%. The most active TXN option is the August 48 put, and it appears traders are either betting on or protecting against a pullback over the next month -- a time frame which includes the company's quarterly earnings report.

Drilling down, 2,535 contracts have changed hands here thus far. Almost all of these traded at the ask price, and volume exceeds current levels of open interest, making it safe to assume new positions are being purchased. The volume-weighted average price for the puts is $0.86, making breakeven at the close on Friday, Aug. 15 -- when back-month options expire -- $47.14 (strike less VWAP). Profit for the put buyers will accrue on a move down to zero, while losses are capped at the premium paid, should TXN finish north of the strike at expiration.

This bearish positioning is a bit puzzling, considering TXN is lingering near multi-year-high territory. What's more, the shares have rallied roughly 29% over the past 52 weeks to trade at $48.92. In the midst of this uptrend, though, the stock's 14-day Relative Strength Index (RSI) has moved to 68 -- suggesting the equity is nearing overbought waters -- which may explain today's 0.7% dip. In light of this, a portion of today's activity at the out-of-the-money August 48 put could be at the hands of shareholders protecting paper profits against a steeper slide.

As noted, TXN will report earnings after the market closes on Monday, July 21. Looking back over the past eight quarters, the stock's post-earnings price action tends to side with bulls, with shares of TXN averaging a gain of 1.1% in the subsequent session. For Texas Instruments Inc.'s (NASDAQ:TXN) second quarter, the Street is calling for a per-share profit of 59 cents -- a penny more than what the company earned one year ago.


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