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Bearish Bettors Feast on Brocade Communications Systems

BRCD's poor price action lures put players

by 5/7/2012 2:34 PM
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Brocade Communications Systems, Inc. (BRCD - 5.03) has been the center of some bearish attention today, as more than 2,900 puts have changed hands so far, reflecting 17 times the equity's expected intraday volume. The bulk of the trading has occurred at the May 5 strike, where approximately 2,600 of these puts have crossed -- almost all of them at the ask price, suggesting they were bought. This option currently holds peak put open interest of just 736 contracts, signaling a fresh batch of new positions. By purchasing these near-the-money puts to open, speculators are expecting the stock to retreat beneath $5 by May expiration.

This jump in put volume marks a change of pace for BRCD. The equity sports a Schaeffer's put/call open interest ratio (SOIR) of just 0.18, confirming that calls outnumber puts by more than five to one among options slated to expire in three months. In fact, this ratio sits just four percentage points above an annual nadir, indicating that near-term options players have rarely been more call-heavy toward the stock during the past year.

It should also be noted that short interest on the network equipment supplier surged by nearly 40% over the most recent reporting period, implying that short sellers looking to hedge their positions are responsible for some of the aforementioned call activity. However, BRCD's bearish crowd is still pretty thin, as these shorted shares make up a paltry 1% of the equity's float.

On the technical front, BRCD has declined by roughly 16% on a year-over-year basis, and has underperformed the broader S&P 500 Index (SPX) by nearly 14% during the past three months. A glance at the charts shows that the stock is already on pace to finish a second consecutive week beneath its 50-week moving average, which had previously acted as support since mid-January.

At last check, BRCD is down about 3% to trade at $5.03.


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