One trader today is using options to simulate a long stock purchase
Marvell Technology Group Ltd. (NASDAQ:MRVL) is popping today, after the semiconductor firm's $6 billion deal to buy Cavium (CAVM) received clearance from the Committee on Foreign Investment in the United States (CFIUS). At last check, MRVL shares were up 2.5% to trade at $22.50, and one speculator appears to be using options to simulate a straight stock purchase.
Taking a quick step back, around 35,000 calls and 5,000 puts have changed hands on MRVL -- more than 13 times the expected intraday amount, and volume pacing in the 100th annual percentile. Most notable are 2,062 August 25 calls that were bought earlier for 59 cents apiece at the same time that 1,031 August 20 puts were sold for 46 cents each.
Trade-Alert pegs this a potential 2x1 risk-reversal ratio spread. If this is the case, the bullish trade was initiated for an net debit of 72 cents [($1.18 premium paid for 2 calls) - 46 cents credit collected for one put]. Similar to a long stock purchase, the trader will profit on a rally north of $25.72 (call strike + premium paid) by August options expiration, while losses could accumulate substantially on a drop below the sold put strike.
This bullish outlook has been growing on MRVL stock in the two weeks leading up to the company's quarterly earnings report -- due after the close next Thursday, May 31. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio of 6.74 ranks in the 73rd annual percentile. In other words, calls have been bought to open over puts at a quicker-than-usual clip, albeit amid relatively low absolute volume.
Regardless, the weekly 6/1 22-strike call has seen the biggest increase in open interest over this two-week time frame. Data points to mostly buy-to-open activity here, with traders betting that the tech stock will continue its recent upside momentum through next week's earnings report.
History is on the side of these options bulls, considering MRVL stock has closed higher the day after the company reports in six of the past eight quarters. Plus, the equity has been in a channel of higher lows since bouncing from its 200-day trendline in early May. In fact, Marvell Technology shares are pacing toward a 12% monthly gain, which would mark their best month since November.
