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Xilinx, Inc. (XLNX) Calls Flying Off the Shelves

Led by large block trade, XLNX call volume is up -- but does it really display optimism?

by 7/10/2013 2:44 PM
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The shares of Xilinx, Inc. (NASDAQ:XLNX) are up 1.8% to trade at $40.88 after announcing the achievement of a pair of industry firsts yesterday. The surge in the stock has option traders betting on additional upside, as call volume has swollen to 11 times its typical intraday average.

Leading the way is the September 42 call, where more than 8,000 contracts have changed hands. Open interest at the strike was about 500 positions heading into the session, meaning that new positions have likely been created. With 81% of the calls traded at the ask, those positions are almost certainly long calls.

Digging slightly deeper, we notice that more than half of the volume can be attributed to a trader who bought to open 4,665 contracts at a premium of $1.12 each. In order for him to end up in the black, he needs the shares of XLNX to advance to $43.12 (strike price plus premium paid) by September options expiration. This would represent a new nine-year high for the programmable platform designer. But even if the shares get stymied south of the strike, the most the trader can lose is the initial net debit.

Today's options-related action is par for the course when it comes to Xilinx, in what is a major change of pace from what we observed last month. Traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open nearly 2,800 calls in the past 10 sessions, compared to fewer than 200 puts. The resultant 10-day call/put volume ratio of 14.37 ranks higher than 88% of similar readings taken in the last 52 weeks, confirming that calls are being scooped up over puts at a more rapid pace than usual.

At the same time, however, short interest on XLNX has ballooned nearly 66% in the previous month -- a sign of pessimism. This may mean that some of the call-buying activity is intended for insurance (rather than speculative) purposes.

From a technical perspective, Xilinx, Inc. (NASDAQ:XLNX) has trailed the broader S&P 500 Index (SPX) year-to-date by a small margin, gaining 14% compared to the SPX's 16%. The shares also have a few layers of support in their 10-, 20-, and 40-week moving averages, which have largely contained the stock's pullbacks since mid-December. Should those trendlines hold up over the foreseeable future, an unwinding among the shorts could create contrarian tailwinds for XLNX.


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