Call Volume Swells As Brocade Communications Systems, Inc. (BRCD) M&A Buzz Swirls

Reports are surfacing that Broadcom Ltd (NASDAQ:AVGO) could be a potential Brocade Communications Systems, Inc. (NASDAQ:BRCD) suitor, sending BRCD stock soaring into double digits

Oct 31, 2016 at 3:28 PM
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After spending most of the session trading between small gains and losses, Brocade Communications Systems, Inc. (NASDAQ:BRCD) shot higher around 12:40 p.m. ET amid reports the networking equipment maker could be on the cusp of putting itself up for sale, and could unveil specifics by week's end. With chipmaker Broadcom Ltd (NASDAQ:AVGO) rumored to be a possible suitor, BRCD stock was last seen up 21.5% at $10.56 -- after being halted earlier -- and call players are flooding its options pits.

By the numbers, around 14,000 call options have changed hands on BRCD so far -- almost seven times the average daily volume of 2,122 calls, and 11 times the number of puts that have traded. In fact, nine of BRCD's 10 most active options are calls, with the November 10 strike in the lead. It looks like a healthy portion of the 3,237 contracts traded here have been bought to open, meaning call buyers are betting today's rally into double digits will continue through front-month options expiration at the close on Friday, Nov. 18.

Today's call-skewed session just echoes the trend seen in BRCD's relatively lightly traded options pits in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 2,383 calls in the last two weeks, compared to just 45 puts. What's more, the resultant 10-day call/put volume ratio of 52.96 ranks in the 95th annual percentile. Drilling down, nearly 72% of these calls were initiated at the April 8 strike.

Short-term traders have been notably call-skewed, as well. In fact, BRCD's Schaeffer's put/call open interest ratio (SOIR) of 0.12 rests lower than 98% of all comparable readings taken in the past year. Simply stated, short-term speculators have rarely been as call-heavy toward BRCD as they are now.

Outside of the options arena, short sellers have reduced their bearish exposure recently. Short interest dropped 23.6% in the two most recent reporting periods, and now accounts for a low 2.7% of BRCD's available float. Analysts, meanwhile, are skeptical, with 14 out of 18 maintaining a "hold" or "strong sell" recommendation.

Technically, BRCD was down 5% year-to-date heading into today's trading. And while today's surge has the shares of Brocade Communications Systems, Inc. (NASDAQ:BRCD) effectively filling their late-August earnings-induced bear gap, the stock is running out of steam near its year-over-year breakeven mark, located at $10.54.

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