Earnings Preview: Red Hat Inc (RHT)

Red Hat Inc (RHT) option players are more put-skewed than usual ahead of tomorrow's earnings

Dec 20, 2016 at 12:30 PM
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Tech firm Red Hat Inc (NYSE:RHT) is set to report earnings tomorrow evening. While analysts stand firmly in the stock's corner, options traders seem to be betting bearishly, with RHT put options more popular than usual.

For the day, RHT is trading 1.2% lower at $79.54. The software stock has added roughly 8.5% since its Dec. 2 lows, but is struggling against the round-number $80 mark, which is RHT's year-over-year breakeven level. Further, RHT has suffered several failed attempts to break out above the $81-$82 region, which is home to its June/July 2015 highs, and is currently in the vicinity of an important Fibonacci retracement level.

In the option pits, RHT's Schaeffer's put/call open interest ratio (SOIR) of 1.42 sits just 1 percentage point from an annual peak, indicating near-term option players have rarely been more put-skewed in the past 12 months. However, heavy call open interest is docked at the January 2017 80 strike, which is RHT's second-largest open interest position, with 2,829 contracts on record. This heavy open interest could reinforce round-number resistance in the short term.

Widening the scope, short interest is down 1.8% over the last reporting period, but there are still 5.5 million RHT shares sold short, or 4.7 times the stock's average daily trading volume. However, analysts remain firmly on the bullish side of the fence, with 14 of 16 rating RHT shares a "buy" or better, and without a single "sell" to be found. A weaker-than-expected earnings showing tomorrow could leave RHT vulnerable to downgrades.

Looking ahead to tomorrow's earnings report, Red Hat Inc (NYSE:RHT) shares have averaged a post-earnings, single-session move of 4.3% over the last eight quarters. Option traders are currently pricing in a more dramatic 8.7% single-session move in either direction. These heightened volatility expectations are seen in the stock's 30-day at-the-money implied volatility, too, which was last seen at 32.4% -- in the elevated 82nd percentile of its annual range.

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