Options Buyers Bullish as Xilinx, Inc. Prepares to Report Earnings

Xilinx, Inc.
Quote |
Chart |
News |
the Silicon Valley stalwart and maker of programmable chips, will report earnings Wednesday, and call option buyers are loading up in advance.

The stock’s Schaeffer’s put/call open interest ratio (SOIR) rests at 0.51, meaning that there are nearly twice as many calls as puts among options scheduled to expire in the next 3 months. That ratio is lower than 98% of all similar readings taken within the past year, suggesting that short-term option traders have rarely been this optimistic.

That sentiment is confirmed by data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE). The combined call/put ratio on the ISE/CBOE over the last 10 days is 2.40, meaning calls bought to open have more than doubled puts during that time period. Bullish traders have been more confident only 15% of the time this year.

The Street also likes XLNX. Analysts surveyed by Zacks have awarded the security 10 “strong buys,” 1 “buy,” 4 “holds,” and no “sells.” They have established an average 12-month price target of $19.85, a 24.5 % premium to Monday’s close of $15.95, according to Thomson Financial.

In general, XLNX, which designs the logic chips that are programmed to perform specific chores in products such as cell phone base stations, network routers, and DVD players, has not disappointed analysts with its earnings reports, exceeding estimates 3 of the past 4 quarters.

However, XLNX last month cut its guidance for third-quarter results. The programmable chip maker expects quarterly sales to fall about 6% to 10%, compared with its October estimate of flat sales. Earnings forecasts by Wall Street have declined and now range from 29 cents to 39 cents, with a mean of 32 cents per share. Analysts expect revenue to be between $430 million and $485 million with a mean of $445.64 million.

Technically, XLNX has gyrated between the $14 and $19 levels since late October, although it has been held firmly in check by its declining 10-week and 20-week moving averages. Twice within the past month the stock managed weekly closings above its 10-week trendline, which now rests at $16.49, only to be pushed back below it the following week.

Weekly Chart of XLNX since December 2007 With 10-Week and 20-Week Moving Averages

In the past few days, the stock has even fallen below its shorter-term 10-day and 20-day moving averages. These trendlines had provided support through most of December.

What does this rising optimism ahead of earnings mean for this languishing stock? Let’s take a look at a specific option strike.

Peak call open interest in the January 2009 series lies at the 17.50 strike, with more than 21,000 contracts.

A disappointing report could set the stage for a sharp drop as these bullish bets are unwound, rendering 17.50 even more distant. But would a favorable report push the stock above that strike level? That’s just a buck and change from Friday’s close. Although XLNX closed above that 17.50 level as recently as last Wednesday, it’s been all downhill since then, and the trendlines are not friendly.

Short sellers might offer some hope to the bulls; a notable 6.4% of the XLNX’s available float has been sold short. Although a positive earnings surprise could translate to a short-squeeze rally, the resistance at the 16-17 level is formidable. At this date, 17.50 seems just out of reach.

Newly revised and updated, Bernie Schaeffer’s home study program, “10 Days to Successful Options Trading,” provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report — Click here to learn more.

Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.