The call purchase could be a play on Analog Device's upcoming earnings release
Semiconductor stock Analog Devices, Inc. (NASDAQ:ADI) has suffered a major pullback since touching a 17-year high of $98.38, with the shares trading near $87 at last check. However, the equity is now bouncing from the 200-day moving average, which not only contained its August pullback, but is also located near the $84 mark, a spot that once served as technical resistance that could now be serving as support. And based on today's options activity, one trader is apparently a big believer in ADI stock.
Specifically, it appears someone bought to open 4,011 March 90 calls for $1.84 apiece, suggesting an initial cash outlay of almost $740,000 (number of calls bought * 100 shares per contract * price paid per contract). That puts the trade's breakeven point at $91.84 (strike plus premium paid), which is a 5.6% jump from current levels. Illustrating the unusual nature of the trade, ADI usually sees an average of just 2,534 total calls traded each day.
Doing a bit more digging, data suggests this could turn out to be a timely trade. First of all, the stock's 30-day implied volatility skew earlier checked in at 16.7%, near a 52-week high, so volatility expectations for puts were much higher than usual, compared to calls. And as alluded to earlier, it appears the shares are swinging higher from technical support, especially since the 14-day Relative Strength Index (RSI) flirted with oversold territory yesterday, standing at just 32 by the close.
Then there's earnings, with the company scheduled to report on Wednesday, Feb. 28. The last two times the company reported earnings in February the shares have gained in the subsequent session, including a 4.8% jump last year.
Lastly, it's worth noting that short interest has been rising on Analog Devices stock. In the last two reporting periods the number of shorted shares increased by nearly 8%, and these bears now control 8.51 million shares. This is almost four times ADI's average daily trading volume, pointing to a healthy amount of buying power sitting on the sidelines.