Options Update: Bears Flex Their Muscles On Flextronics International

• July 14, 2008
• Mark Fightmaster

Flex What?

What is the first thing you think about when you initially hear the name Flextronics International
, or its ticker, FLEX? If you thought of Arnold Schwarzenegger posing on stage in his skivvies, you probably aren’t alone – I can’t say that was the first thing I thought of, but I am familiar with the company. FLEX isn’t related to bodybuilding or health. In fact, it is a global provider of electronics manufacturing services (EMS) to original equipment manufacturers.

Searching for a reason for today’s heavy option activity on the EMS master, I found that a Swiss-based solar firm, Oerlikon Solar, has signed an agreement with FLEX. The latter will support the former’s scalability requirements for global production capacity , which will allow Oerlikon to execute more simultaneous projects in multiple geographies. Initially, I thought that the activity may have had something to do with FLEX’s July 24th earnings, but today’s active options are of the July variety – they will expire before the earnings report.

That said, let’s get straight to what caught my eye today.

According to today’s Intraday Volume Explosion List, the put arena is flexing its muscle. Puts on FLEX have been heavily traded, with total volume coming in nearly 15 times the norm. Of the 10,225 total puts traded, some 7,900 crossed on the July 10 put (QFL SB). At the time we pulled our data, this contract carried a price of $1.31, and the stock checked in at $8.81.

The action on QFL SB was likely dominated by individual investors, as there were no 4-digit transactions crossing the tape. This simply means that today’s action was dominated by smaller investors that are trying to find a quick profit by playing short-term, in-the-money options – assuming the transactions were the initiation of new positions.

Trying to Flex Their Muscles

Each group that I like to use as a sentiment gauge (analysts, option players) issues a rather definitive feeling on FLEX – and they disagree with each other. Starting with analysts, the chart on the left shows that the pervasive feeling from this group is strongly bullish. According to Zacks, FLEX receives 9 of the supposedly rare (and very bullish) “strong buy” rating, 3 “buys,” and 2 “holds.” This ratings configuration indicates that there is quite a bit of optimism that could unwind toward FLEX at a moment’s notice.

The other end of the sentiment spectrum is represented by option players. FLEX’s Schaeffer’s put/call open interest ratio (SOIR) of 0.62 is higher than 90% of those taken during the past year. In other words, the near-term options bunch has been more pessimistically aligned just 10% of the time during the past 52 weeks. This sentiment could unwind as well at the snap of a finger, this time in the form of buying pressure, which could in turn push the shares higher.

Trying to Show Some Strength

Looking at a long-term picture, it seems that both of these groups have misplaced sentiment. FLEX has bounced between the support of the 10 level (with a few closes in the 9 region) and the 12 level (with a few exceptions, as well) since the middle of 2005. That said, it certainly seems that the bearish option speculators may win this battle of the minds.

While the longer-term trend certainly suggests complacence, the intermediate-term trend indicates a potential for underperformance. Notice that the 9 level had acted as rather staunch support on 3 tests prior to the first week of the month. Since the calendar turned to July, the shares have found the 9 level acting as resistance rather than support. Will this trend continue? Honestly, our hypothetical option purchasers hope it holds through the end of this week – then it doesn’t matter.

The stock continues to retreat, and it certainly appears as if FLEX’s 4-week drop of 19% could continue. This assertion comes courtesy of an overhead bearish cross between FLEX’s 10- and 20-week moving averages. If this formation comes to fruition, it could indicate a further downtrend – which could serve to keep the stock below the 9 level.

The Verdict? I’ll side with the option players in this instance. The path of least resistance for FLEX certainly seems to lead lower. Once the brokerage community comes to this realization, we could see the issuing of momentum-destroying downgrades.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

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