Options Traders Circle Sinking ZTE Suppliers

Loop Capital: There is now greater uncertainty around the Oclaro buyout

by Andrea Kramer

Published on Apr 16, 2018 at 1:40 PM

The shares of American optical component makers are sinking today, after the Commerce Department announced plans for a seven-year ban on selling to Chinese telecom concern ZTE Corp. Oclaro Inc (NASDAQ:OCLR) -- which reportedly generated 18% of last year's revenue from ZTE -- and sector peer Lumentum Holdings Inc (NASDAQ:LITE) are seeing unusual options activity on the news, with both OCLR and LITE stocks swimming in red ink.

Analyst: Greater Uncertainty Around Oclaro Deal

OCLR shares are down 12% at $8.28, at last check, attempting to hold atop their 200-day moving average. This trendline roughly coincides with where the equity was trading prior to a March bull gap, triggered by plans for the company to sell itself to Lumentum for $1.7 billion. Nevertheless, analysts at Loop Capital Markets say they still expect the Oclaro acquisition to take place, "despite the somewhat impaired value of Oclaro's business post this ban," but "acknowledge there is now greater uncertainty around the deal."

Options traders, meanwhile, are scooping up OCLR contracts at 14 times the average intraday clip today. Roughly 5,500 calls and 5,00 puts have traded thus far, with notable sweeps going off at the April 8 call and January 2019 5-strike put. If speculators are buying the puts to open, they're either betting on or hedging against a steep drop south of $5 for OCLR shares by January 2019 options expiration.

Options Traders Eye a Short-Term Ceiling for LITE

Lumentum stock was last seen 6.6% lower to trade at $60.02, also testing its 200-day moving average, which recently made a "death cross" with its 50-day counterpart. LITE shares have shed roughly 19% since notching a record high of $74.40 on March 12.

LITE calls are trading at four times the average afternoon pace, with more than 4,100 exchanged so far. It looks like some traders may be speculating on a short-term ceiling for the stock, selling to open April 64 calls. As long as the shares remain south of $64 through Friday's close, the options will expire worthless and the sellers can retain the entire premium received at initiation.

While Lumentum shares are currently on the short-sale restricted list, several shorts are likely cheering the ZTE developments. Short interest represents more than 18% of the equity's total available float, with 11.1 million LITE shares sold short.

Meanwhile, the security could be vulnerable to analyst downgrades. Thirteen of 14 analysts maintain "strong buy" endorsements on LITE. Plus, the average 12-month price target of $82.56 represents a premium of more than 37% to the security's current price.

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