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There's been a growing demand for calls on ARM Holdings plc (ADR) (NASDAQ:ARMH - 36.94) in recent weeks, as evidenced by data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, the stock's 10-day call/put volume ratio has risen to 6.91, from its 50-day call/put volume ratio of 0.56. What's more, this shorter-term ratio ranks in the 90th percentile of its annual range, indicating calls have been bought to open over puts at a near annual-high clip in recent weeks.
It's a decidedly different scene in today's session, though, where puts are outpacing their call counterparts. At last check, roughly 3,200 put contracts have changed hands, representing more than 11 times the average intraday volume. By comparison, around 1,800 call contracts have traded.
The majority of today's put volume is centered at the January 2013 35-strike put. Of the roughly 2,750 contracts that have traded, 96% have crossed at the ask price, implied volatility has moved higher, and only 75 contracts currently make up open interest at this strike. Putting it all together, it seems new positions are being initiated here.
By buying these puts to open for a volume-weighted average price (VWAP) of $1.16, traders will begin to profit with each step below $33.84 (the strike minus the average premium paid) ARMH takes through Jan. 18, when the options expire. This represents an 8.4% drop from current levels.
Today's activity in the options pits is a bit puzzling given ARMH's technical backdrop. On a relative-strength basis, the equity has outperformed the broader S&P 500 Index (SPX) by 34 percentage points over the past two months. Plus, the shares have surged 33.8% in 2012. This positive price action has been highlighted by ARMH's 10-day moving average, which as ushered the equity up the charts since mid-September. In fact, the stock tagged a 12-year high of $37.07 in today's session, following an early morning price-target hike from Barclays.
In light of this, as well as the withstanding positive sentiment in the options arena, today's preference for out-of-the-money puts may simply represent shareholders protecting their profits against a potential pullback. With the stock's Relative Strength Index (RSI) of 73 sitting solidly in overbought territory, a near-term consolidation isn't out of the question. Additionally, now is an opportune time to buy premium on ARMH's January 2013 35 put, as implied volatility at this strike is currently deflated relative to the stock's 40-day realized (historical) volatility (32% vs. 36.8%). In other words, this options-related insurance is comparatively cheap.