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Shares of Aruba Networks, Inc. (NASDAQ:ARUN - 25.13) soared by more than 22% on Friday, thanks to the previous day's stronger-than-expected quarterly earnings report. Nevertheless, the positive results didn't keep the bears at bay, as approximately 20,000 puts changed hands during the course of Friday's session, which was more than five times the security's average single-session put volume.
A large portion of the action centered around the July 20 and 23 puts, where matching blocks of contracts crossed the tape simultaneously. Specifically, 3,440 puts were sold at the 20 strike for $1.09 each, while an equal number of puts were purchased at the 23 strike for $2.19 apiece -- yielding a net debit of $1.10 per pair of contracts. Since both strikes saw a rise in open interest over the weekend, it's likely that one trader constructed a bear put spread on ARUN.
In this strategy, the speculator is betting on the tech concern to finish at or below $20 by July expiration. Although he can profit with each step the stock takes below $21.90 (bought strike minus net debit), his maximum reward is limited to $1.90 -- or the difference between the strike prices, minus the net debit. On the other hand, his potential risk is capped at the net debit paid.
ARUN is certainly no stranger to bearish speculation, according to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the last 10 weeks, traders have bought to open 158 puts for every 100 calls. This 50-day put/call volume ratio of 1.58 is just 4 percentage points shy of a yearly peak, confirming speculators have rarely snapped up puts over calls at a faster pace during the past year.
As a result, Schaeffer's put/call open interest ratio (SOIR) for ARUN sits at 1.26, with puts outstripping calls among options slated to expire within the next three months. This ratio ranks higher than 92% of comparable annual readings, meaning near-term traders have been more bearishly aligned toward the stock just 8% of the time during the last 12 months.
ARUN has been an outperformer on the technical front, having gained more than 22% year-to-date, and about 17% on a year-over-year basis. What's more, the stock has also bested the broader S&P 500 Index (SPX) by north of 24 percentage points during the past three months. It remains to be seen whether the shares will fall low enough by July expiration to reward Friday's spread strategist.