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It's been a rough few months for Applied Materials, Inc. (AMAT - 10.28), with the shares surrendering roughly 21.5% since skimming the $13 level in late March. Now, the equity is clinging to life just north of the $10 neighborhood -- a level not breached on a weekly closing basis since March 2009 -- and is staring up at resistance at its 10-week moving average. Against this backdrop, it appears some options traders are employing calls to bet on a continued downtrend -- or limited upside momentum, at least -- over the coming months. Others, meanwhile, are using these vehicles to gamble on round-number support.
During the course of Tuesday's session, AMAT saw roughly 13,000 calls cross the tape -- about three times its average daily call volume, and around eight times the number of AMAT puts exchanged. Much of the attention centered on the October 12 call, which saw more than 4,100 contracts change hands -- 99% of which crossed at the bid price, suggesting they were sold. Plus, call open interest at the out-of-the-money strike ballooned by 3,860 contracts overnight, hinting at sell-to-open activity.
By writing the 12-strike calls to open, the sellers are expecting the shares of AMAT to remain south of $12 throughout the options' lifetime. In this best-case scenario, the calls will expire worthless, and the sellers can retain the entire premium received from the sale, which represents the maximum potential reward on the play.
However, yesterday's affinity for short calls stands in stark contrast to the growing trend seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where AMAT sports a 10-day call/put volume ratio of 4.86. In other words, options traders have bought to open almost five AMAT calls for every put during the past couple of weeks. Plus, this ratio ranks in the 76th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets over bearish.
More in line with the recent activity on the major exchanges, it looks like some shorter-term options traders bought to open AMAT's June 10 call, which saw nearly 3,500 contracts change hands -- all at the ask price. Plus, call open interest at the front-month strike swelled by 2,320 contracts overnight, underscoring our theory of newly initiated bullish bets. By purchasing the calls to open, the traders are expecting AMAT to rebound off support at the $10 level in the short term.