Options Update: Are Options Traders Calling a Bottom for Texas Instruments?

Shares of Texas Instruments
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have plunged nearly 9% this morning, as investors and analysts are blasting the company’s latest quarterly report. For the third-quarter, TXN said it earned $563 million, or 43 cents per share, on revenue of $3.4 billion. Analysts were looking for a profit of 44 cents per share on revenue of $3.4 billion. The company also stated that it sees revenue falling for the fourth and first quarters.

The brokerage community was out in force this morning, with Deutsche Bank cutting TXN to “hold” from “buy,” while Jefferies cut its price target to $20 per share from $26. Several other brokerage firms also slashed their price targets for TXN:

  • Stifel cut the shares to $26 from $33
  • Needham lowered its target to $20 from $25

  • Citigroup dropped its target to $20 from $28

  • Goldman cut TXN to $23 from $26

  • S&P Equities Research slashed its price target by $7 to $20 per share

According to Thomson Financial the average 12-month price target for TXN rests at $27 per share, indicating that there is more potential fat for the brokerage community to trim from expectations.

Despite the poor earnings, negative analyst comments, and the corresponding plunge in TXN shares, call options are the flavor of choice for speculative traders today. More than 22,200 of these bullishly inclined options have changed hands so far, outpacing TXN’s average daily call volume by a ratio of nearly 6-to-1 and placing the stock on today’s Intraday Volume Explosion List. However, it was the fact that most of this activity crossed at the stock’s January 2009 20 call that caught my eye this afternoon.

Texas Instruments option volume details

The Anatomy of a Texas Instruments Call Position

Diving into the options data, I noticed that nearly all of the TXN January 2009 20 call volume crossed the tape in 1 rather large block, trading at 10:12 a.m. Eastern time at the ask price. Combine this data with the fact that volume at this option easily exceeds open interest of just 5,331 contracts, and TXN is likely being targeted by heavy buy-to-open call activity. Running with the call-buying theme, it would appear that a trader purchased 20,000 TXN January 2009 20 calls for the ask price of $0.51. The total outlay for this position would be $1,020,000 — ($0.51 * 100)*20,000 = $1,020,000. For this trade to reach breakeven, TXN would need to rally about 14% from yesterday’s close of $17.98 per share before the options expire on January 16, 2009. The maximum loss on this position is limited to the initial investment of $1,020,000.

By entering this trade, the investor is indicating that he expects TXN to rally sharply during the next several months, reversing today’s loss of nearly 9%. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

Looking at a daily chart of TXN does little to embolden bullish call traders. The stock has fallen more than 46% since the beginning of 2008, with a sell-off of roughly 50% since peaking in late May. Throughout this time frame, the shares have been plagued by resistance at their declining 10-day and 20-day moving averages. The former of these has taken up residence in the 18-18.50 region, site of the stock’s August 2004 lows. Meanwhile the latter trendline is perched at the round-number 20 level – site of the purchased January 2009 20 call. There is an argument to be made that TXN could rebound from today’s losses, given a potentially oversold environment. However, there are significant technical hurdles at the 18 and 20 levels that could keep a January 2009 20 call from ever reaching breakeven.

Daily chart of Texas Instruments since May 2008 with 10-day and 20-day moving averages

The Sentiment Drivers

Turning to TXN’s sentiment backdrop, we find a mixed outlook. First, options traders have been pretty complacent in regard to the equity’s prospects. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.87 ranks near the midpoint of its annual range, indicating complacency from the speculative crowd. What’s more, today’s call volume hints that we may see this ratio begin to move lower. As contrarians know, rising optimism on a falling stock has negative implications for the shares.

Meanwhile, as noted above, there is room for more price-target cuts from Wall Street analysts, given that the current 12-month price target rests some 63% above the stock’s current trading range near $16.50 per share. What’s more, Zacks.com reports that 9 of the 25 analysts following TXN still rate the shares a “buy” or better. Should these remaining bulls downgrade their ratings on the company following last night’s poor quarterly report, it could mean additional downside for TXN shares.

Sentiment indicators for Texas Instruments

The Verdict?

Positioning a bullish call position in the January 2009 series of options gives the trader ample time for TXN to right itself and potentially end its recent downtrend. That said, there is little in the sentiment or technical backdrop that leads me to believe that the shares will rally much higher than the 18-19 region during the next several months – especially given the current fears regarding a global economic recession. However, it is the potential for TXN to rally even as high as resistance at the 20 level that would make me pause when considering a put position on the security. If a trader were to consider a put position on TXN to take advantage of an extended decline in the equity, say a December or January 2009 17.50 put, he would also want to consider hedging that position with a call on another sector peer or the Semiconductor HOLDRS Trust. This doesn’t mean that the trader has to be bullish on the semiconductor sector, as he is merely looking to offset any potential market headwinds within the sector that could adversely affect a TXN put position.

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