Stocks quoted in this article:
As Rackspace Hosting, Inc. (NYSE:RAX - 74.38) prepares to take its turn in the earnings confessional following tomorrow's close, the stock has seen a spike in bullish options activity today. Nearly 5,900 calls have changed hands so far, which is almost seven times the norm, and more than triple the number of puts traded. Most active has been the March 85 call, where north of 1,800 contracts have been exchanged -- 96% of them at the ask price, suggesting they were purchased.
Digging deeper into the data, these out-of-the-money calls crossed at a volume-weighted average price (VWAP) of $0.93. Since this strike is home to open interest of fewer than 1,400 contracts -- while implied volatility has climbed 3.3 percentage points during the course of the session -- it's very likely that some of today's volume is comprised of new positions. In order for speculators to realize a profit on these bought-to-open calls, RAX must rally north of $85.93 (strike price plus the VWAP) by March expiration. This reflects expected upside of about 15.5% to the stock's current price, as well as territory not yet charted by the cloud computing firm.
Today's preference for calls over puts notwithstanding, RAX's current near-term trend is one of the bearish variety. The equity's Schaeffer's put/call open interest ratio (SOIR) checks in at 1.50, with calls outstripping puts among the front three-months' series of options. This ratio ranks higher than 77% of comparable readings collected within the last 12 months, indicating short-term options players are more put-heavy toward the stock than usual.
Although the security is off to a sluggish start in 2013 -- hovering just above breakeven year-to-date -- RAX still boasts a year-over-year gain of more than 53%. What's more, the shares have outperformed the broader S&P 500 Index (SPX) by roughly 7 percentage points during the last three months. Still, the aforementioned March 85 call sports a delta of just 18, suggesting the option has a less than 1-in-5 chance of finishing in the money.
As previously noted, RAX is on deck to report fourth-quarter earnings after tomorrow's closing bell, and has fallen short of consensus bottom-line estimates in three of the past four quarters. Analysts are currently expecting a per-share profit of 21 cents. Should history repeat itself, however, the most today's bulls risk losing is the premium paid for their call purchases.