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Analog Devices Attracts Option Bears, Spread Traders Ahead of Earnings

It appears one speculator constructed a long straddle on ADI

by 11/17/2011 1:59 PM
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Digital concern Analog Devices, Inc. (ADI - 35.35) will take the earnings reins next week, with the firm slated to release its fiscal fourth-quarter figures after the closing bell on Monday. Ahead of the event, the options crowd has shown an increased appetite for bearish bets over bullish, though it appears one speculator today may be taking a more neutral route to gamble on a post-earnings price swing.

Earlier today, symmetrical blocks of 1,700 contracts traded at the March 36 strike -- one on the call side, and another on the put side of the tape. The blocks exceeded open interest on both sides of the aisle, pointing to the initiation of a new spread. Plus, the options crossed slightly closer to their respective ask prices -- the calls at $2.70, the puts at $3.30 -- suggesting the speculator constructed a long straddle on the stock.

Assuming the options were, in fact, bought, the spread was established for a net debit of $6 per pair of contracts. As such, the trader needs the shares of ADI to perforate one of two breakeven rails within the next several months: the $30 level (strike minus net debit) on the downside, or the $42 level (strike plus net debit) on the upside. However, even if ADI remains glued to the $36 level over the long term, the most the investor can possibly lose is capped at the $6 paid to initiate the trade.

As alluded to earlier, a healthy portion of options traders have upped the bearish ante ahead of ADI's turn in the earnings confessional. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day put/call volume ratio of 2.32, indicating that speculators have bought to open more than two puts for every call during the past couple of weeks. What's more, this ratio registers in the 80th percentile of its annual range, hinting at a healthier-than-usual appetite for pessimistic positions of late.

In afternoon trading, ADI has shed 3.3% to explore the $35.35 area -- home to its 10-week moving average.


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