Will Palo Alto Networks Inc (PANW) Break Lower After Earnings?

One options trader is bracing for Palo Alto Networks (NYSE:PANW) to break out to the downside after earnings

by Elizabeth Harrow

Published on Nov 23, 2015 at 2:50 PM
Updated on Jun 24, 2020 at 10:16 AM

Cybersecurity specialist Palo Alto Networks (NYSE:PANW) is scheduled to report its fiscal first-quarter earnings after today's closing bell, with analysts predicting a profit of 32 cents per share. Following its last quarterly report in early September, PANW rallied 7.4% in the ensuing session -- and some traders appear to be banking on another big move post-earnings.

Option volume on PANW is running at roughly four times the norm this afternoon, with approximately 12,000 calls and 14,000 puts changing hands so far. The most active strike is the weekly 11/27 165-strike put, where just over 1,500 contracts have traded. There are fewer than 1,000 contracts in open interest here, so it's safe to say some new positions are being opened at this out-of-the-money put strike.

Digging deeper, a block of 590 of these 165-strike puts traded simultaneously with a matching block of weekly 11/27 180-strike calls. The puts traded near the ask price at $3.25, while the calls crossed near the bid price of $2.34. This points to the initiation of either a collar, with a PANW shareholder hedging ahead of earnings, or a bearish risk-reversal, where the trader is selling calls to finance the purchase of the puts.

From a broader perspective, options traders have been favoring PANW calls over puts lately. During the past 10 days, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.57 calls for every put on the stock. This ratio arrives in the 84th annual percentile, signaling an elevated preference for bullish bets over bearish.

With PANW shares up about 40% in 2015 -- easily outperforming the broader PowerShares QQQ Trust (QQQ), with its roughly 10% rise -- it's not surprising to see this kind of optimism surrounding the stock ahead of earnings. However, PANW is off about 14% from its July high north of $200 to trade at $172.18, and the stock has spent most of the last two months bouncing between support at its 50-week moving average and resistance at its 20-week moving average. Based on today's spread play in the weekly 11/27 series, at least one speculator suspects the odds are now tilted in favor of a downside move.

Meanwhile, with earnings just hours away, options on Palo Alto Networks (NYSE:PANW) are relatively pricey. A 170-strike straddle in the weekly 11/27 series is pricing in a 6.5% move in PANW, outstripping its average 5.8% post-earnings swing over the past eight quarters.

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