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Will SanDisk's Rally Fizzle?

SNDK option traders predict a pullback

by 9/11/2012 12:41 PM
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The shares of SanDisk Corporation (NASDAQ:SNDK - 44.32) are on pace to notch a fourth straight victory atop their 200-day moving average -- a feat not accomplished since early April. Nevertheless, some options traders are expecting SNDK's recent rally to fizzle, as evidenced by today's healthier-than-usual appetite for short-term puts.

Around midday, the data storage provider has already seen close to 4,700 puts change hands, marking a 60% increase to its average intraday put activity, and nearly doubling the number of SNDK calls exchanged. Most active has been the weekly 43-strike put, which has seen more than 1,100 contracts traded on open interest of just 151, pointing to an influx of new initiations. Plus, more than two-thirds of the puts have crossed at the ask price, hinting at buyer-fueled volume.

By purchasing the puts to open, the buyers are betting on SNDK to backpedal beneath the $43 level by week's end. More specifically, the volume-weighted average price of the puts is $0.35, meaning the buyers will begin to profit if SNDK breaches the $42.65 level (strike minus premium paid) by Friday's closing bell.

Broadening our sentiment scope, we find that today's preference for puts marks a change of pace in the options arena. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.77 indicates that calls comfortably outnumber puts among options expiring within three months. What's more, this ratio registers in the 20th percentile of its annual range, implying that near-term options players are much more call-skewed than usual at the moment.

In the same optimistic vein, the brokerage bunch seems enamored of SNDK. Currently, the stock boasts 11 "strong buys" and four "buy" ratings, compared to eight lukewarm "holds" and just one "sell" or worse recommendation. What's more, just yesterday analysts at S&P Capital IQ upgraded the stock to "strong buy" from "buy." In addition, some analysts are speculating that the chipmaker could be a potential supplier for Apple Inc. (NASDAQ:AAPL), which will unveil its iPhone 5 tomorrow.

As alluded to earlier, SNDK has been impressive on the charts of late, outperforming the broader S&P 500 Index (SPX) by 27 percentage points during the past 40 sessions. However, it's worth noting that peak call open interest in the September series sits at the overhead 45 strike, with more than 6,800 contracts outstanding. In the short term, this abundance of bullish bets could translate into an options-related speed bump for SNDK.

Daily Chart of SNDK since March 2012 With 200-Day Moving Average


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