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Salesforce.com Attracts Pre-Earnings Bears

CRM traders are targeting out-of-the-money weekly put options

by 11/20/2012 10:35 AM
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The shares of Salesforce.com, inc. (NYSE:CRM - 147.52) are bucking the broad-market trend lower this morning, adding to their year-to-date advance of more than 45%. However, it looks like a few CRM followers are bracing for some short-term speed bumps, as evidenced by today's affinity for weekly put options.

Already today, CRM has seen more than 8,300 puts cross the tape -- about four times its average intraday put volume, and roughly double the number of CRM calls exchanged. Most popular has been the out-of-the-money weekly 120-strike put, which has seen over 1,100 contracts change hands. The majority of the puts have traded at the ask price, and implied volatility on the near-term contract has rocketed more than 20 percentage points higher, hinting at buy-to-open activity.

By purchasing the puts to open, the buyers have one of two objectives: to capitalize on a significant pullback in the wake of tonight's earnings release, or to lock in gains on a long stock position. The former will profit if CRM breaches the $119.74 level (strike minus volume-weighted average price of $0.26) -- in territory not charted in almost 10 months -- by Friday's close, when the options expire. The latter are shareholders above all else, meaning their primary goal is for CRM to power higher, but they're willing to part with their shares at $120, should the stock tumble over the next couple of sessions.

From a broader sentiment standpoint, we find that CRM is no stranger to short-term put activity. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.51 indicates that puts outnumber calls among options with a shelf-life of three months or less. Furthermore, this ratio stands higher than 93% of all others of the past year, suggesting near-term option players have rarely been more put-heavy during the past 12 months.

Echoing that skepticism, short interest jumped 17.5% during the past month, and now accounts for 11.7% of CRM's total available float. In fact, at the equity's average pace of trading, it would take around eight sessions to repurchase all of these pessimistic positions.

During the past couple of months, the shares of CRM have pulled back along with the broader equities market, ushered lower beneath their 10-day and 20-day moving averages. However, the stock has tacked on more than 2% so far this week, and is on pace to end a second straight session north of the aforementioned trendlines.

Daily Chart of CRN since September 2012 With 10-Day and 20-Day Moving Averages

Fundamentally, CRM has bested the Street's per-share profit projections in each of the past four quarters, Thomson Reuters reports. Should the company once again report stronger-than-anticipated earnings tonight, an unwinding of pessimism in the options pits, or a short-squeeze situation, could help the shares extend their recent rebound.


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