Options Update: Call Volume Floods SanDisk Following Samsung Interest
Let the speculation begin! According to a report in a South Korean online newspaper, Samsung Electronics, the world’s largest producer of flash-memory chips, is considering making a play for competitor SanDisk
(
SDNK |
Quote |
Chart |
News |
PowerRating).
Neither Samsung nor SanDisk have confirmed or denied the report, but that hasn’t stopped traders from sending SNDK shares soaring more than 28% higher on the news. Wall Street analysts have even jumped on the news, with S&P Equity Research lifting the shares to “hold” from “sell,” and Caris & Company lifting SNDK to “average.”
As always, where there’s smoke, there’s fire, and options speculators have blazed a bullish path toward SNDK shares in today’s trading. The stock’s call volume is more than 7.5 times the daily average and climbing, with some 45,000 contracts changing hands so far today. The activity has placed SNDK on our Intraday Volume Explosion List, but what caught my eye was the heavy attention to the stock’s September 17.50 call. More than 16,900 contracts have traded at this front-month option today, easily outstripping open interest of 10,113 contracts. What’s more, the majority of this volume is crossing the tape at the ask price, indicating that options traders could be buying (to open) new long call positions on SNDK following this morning’s news.
Anatomy of a SanDisk Call Position
Digging into SNDK’s call volume, I noticed a particularly large block of 1,000 contracts amid the flood of block trades ranging from 300 to 700 contracts. At 9:46 a.m. Eastern time, this block of 1,000 SNDK September 17.50 calls traded at the ask price of $0.95 – we’ll use this trade as today’s example. Running with this call-buying theme, let’s how the trade actually plays out:
The hypothetical trader purchased 1,000 SNDK September 17.50 calls for $0.95, or a total outlay of $95,000 — ($0.95 * 100)*1,000 = $95,000. For this trade to reach breakeven, SNDK would need to gain another 7% (on top of today’s 28% rally) to $18.45 per share. We arrive at this by adding the cost of the option ($0.95) to the strike of the purchased 17.50 call ($0.95 + $17.50 = $18.45).
With about 2 weeks until September options expire, the key to this trade is more speculation on a Samsung buyout of SNDK – or an actual deal emerging from the Korean flash-memory giant. Given the stock’s year-to-date loss of more than 59% (even after today’s surge), it’s pretty clear SNDK would quickly plunge back to the 15 region should Samsung walk away from the table. But, despite the risks from a non-event, the call trader’s risk is limited to the $95,000 paid to enter the position. That said, let’s see exactly where the SNDK stands from a technical and sentiment standpoint.
Getting Technical
There is just no hiding the fact that SNDK is a struggling stock. Prior to today’s 28% surge, the stock was sitting on a 52-week loss of more than 75%, having sold off dramatically from its July 2007 peak near $60 per share. Throughout this time frame, SNDK has struggled with resistance at its 10-week and 20-week moving averages. The shares have bested the former of these intermediate-term trendlines in today’s trading, but I would not expect the 10-week to provide any support in the event that Samsung decides against the buying the company.
Even if we remove the assumption that the SNDK will plunge immediately after Samsung pulls the plug, the stock is staring up at staunch resistance in the 18 region. The shares have not bested this level on a weekly basis since early July, and could be turned away from this overhead resistance of their own accord. As for support, the 14 level appears to be the most likely backstop for any decline – an 18% decline from SNDK’s current trading range near 17.24.
The Sentiment Drivers
Looking over SNDK’s sentiment indicators, I see very little in the way of support for the stock. The equity’s Schaeffer’s put/call open interest ratio (SOIR) of 0.39 ranks below 76% of all those taken during the past year, indicating that options traders were already quite bullish on the shares prior to this morning’s news. But this SOIR reading can only negatively impact a SNDK September 17.50 call position. In the event of a buyout, SNDK rallies to the purchase price, and call buyers are happy. Meanwhile, no deal leaves these bullish investors either holding the bag and eating their losses, or jumping ship as quickly as they can to limit losses. The latter scenario could increase selling pressure on the underlying shares, thus exacerbating the decline.
On the analyst front, we’ve already heard from a couple brokerage firms, which lifted their ratings on the report. I would imagine that should Samsung walk away that these analysts would resume their negative coverage of SNDK. Meanwhile, Zacks.com reports that analysts have doled out 2 “buys,” 11 “holds,” and 4 “sells.” Again, this configuration only negatively impacts a purchased SNDK September 17.50 call, as potential downgrades following a non-event could send the shares sharply lower.
The Verdict?
I would only recommend entering today’s hypothetical SNDK September 17.50 call position if you had a high conviction that Samsung will snatch up SanDisk. Otherwise, the stock looks especially abysmal. Considering the usual technical blowback following the resolution of buyout rumors on the Street, and the potential for downgrades from Wall Street and additional selling pressure from the options crowd, a buyout by Samsung is the only real driver that I see for SNDK shares to rally more than 7% in less than 2 weeks.
Did you know that you can get headlines for my articles emailed directly to you? If you’d like to take advantage of this service, simply go to www.Schaeffersresearch.com and sign in with your Schaeffer’s username and password. Once on the alerts page, select author from the first drop down box, select how often you want to be alerted (intraday, daily, weekly, or monthly), and enter Joseph Hargett into the third box.
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.