Options Update: Heavy Post-Earnings Option Activity on Juniper Networks

• July 25, 2008
• Mark Fightmaster

Jumpin’ Juniper

Plenty of news for Juniper Networks
today, starting with the company’s earnings report, which was released after the market closed last night. The company reported strong sales, which led to a 40% jump in second-quarter net income. The firm logged earnings of 28 cents per share for the quarter, 2 cents better than the consensus estimate. The earnings announcement was preceded by news that Kevin Johnson left Microsoft to join the company as CEO.

This combination of news has helped push JNPR nearly 14% higher this afternoon, giving option players reason to jump in as well – which is what caught my eye today.

According to today’s Intraday Volume Explosion List, JNPR has seen heavy activity on both the put and call sides of the option pits. As for the puts, JNPR has seen total daily activity increase nearly 6.5 times the average, with a good amount of the activity falling at the August 24 strike (JUX TS). Over to the calls, the daily action has increased slightly more than 4 times the norm, with most of the action crossing on the August 23 contract (JUX HR).

With JNPR currently trading in the upper reaches of the 25 region, one may assume that the put activity is the liquidation of positions while the call activity is the opening of new positions. This is more than likely true, but I went a diggin’ anyway. The only transactions of note took place on the put, when a block of 1,487 contracts crossed at 9:39 AM EST, closely followed by a block of 2,177 contracts. The strike price on both of these transactions was directly in between the bid and ask prices, making it difficult to discern the nature of the transactions.

Analysts Aren’t Jumping On Board

Actually, this may be a bit of an unfair assessment, as Zacks shows JNPR receiving 7 “strong buys,” 1 “buy,” and 14 “holds.” While this coverage isn’t outrageously bullish, it does afford an opportunity for downgrades – which could effectively kill any gathered momentum. Of course, there is a much larger chance for upgrades from “hold,” which could help kick the stock in the butt and help it move higher (that is assuming that stocks have a butt). Analyst upgrades may have a hand in today’s gain, as FBR upped JNPR to “outperform” from “market perform,” Citigroup raised the firm to “buy” from “hold,” and BWS financial raised JNPR to “buy” from “hold.” In addition, Citigroup decided to add JNPR to its Top Picks Live list. Was all of this action simply reactionary? Possibly; let’s see if any other brokerages issue upgrades in the coming weeks (when the news is slow).

Option players are less enthusiastic toward JNPR. The firm’s Schaeffer’s put/call open interest ratio (SOIR) of 1.18 is higher than 72% of those taken during the past 52 weeks. Yes, this pessimism could unwind and push the stock higher (which could be contributing to today’s jump), but there is also room for more pessimism to creep into the picture and act as an anchor.

The Stock Jumps … Today

I don’t want to make light of today’s jump, but when is a 15% jump a reason to worry? When the jump higher doesn’t result in the stock breaking through overhead resistance. Yes, today’s jump took out resistance at the 24 level, but the stock has since slunk back below potential resistance at the 26, 26.50, and 27 levels. All of these levels acted as resistance earlier this year and appear ready to do the same again.

Moreover, let’s not lose sight of the fact that JNPR has lost 26.5% in the past 52 weeks, and 32% since the beginning of January. While today’s jump higher is nice, it has failed to break above a trendline that connects the stock’s highs since its October 2007 peak of 37.95 through this week.

The Verdict? Is it significant that the stock is set to finish this week atop its 10- and 20-week moving averages? Yes. In fact, we could see these levels act as support; however, I wouldn’t place all my hopes for support on these trendlines alone. Let’s see if the 24 level can provide support if needed, then I may start to have bullish feelings for the stock.

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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