Options Update: Juniper Networks’ Calls Spike on Tech Stimulus Speculation
While many have heard President Obama express his desire to push technology forward in the U.S. as part of his new stimulus package, few details on the potential impact of such a plan have been forthcoming. However, tech investors have begun to more closely scrutinize the current version of the approximately $838 billion package moving through the Senate. Of particular interest is a portion of the bill that could earmark as much as $8 billion for expanding the high-speed Internet infrastructure to rural communities.
Options traders have seized upon this potential infrastructure spending by piling into Juniper Networks
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PowerRating) calls in today’s trading. So far, more than 14,800 of these bullishly oriented options have changed hands on JNPR, more than doubling its daily average and placing the security on our Intraday Volume Explosion List. Nearly all of this call activity traded on the stock’s March 16 strike, with volume of 11,910 contracts far exceeding open interest of 3,532 contracts at this back-month option.
The Anatomy of a Juniper Networks Call Position
Digging into the activity, I noticed that 4 blocks – ranging from 100 contracts to 4,749 contracts – all traded at the same time on the same exchange, suggesting that they were part of a larger position. Specifically, 10,010 March 16 calls changed hands at the ask price of $1.45 at 10:36 a.m. Eastern time. Assuming that these contracts were all placed by the same trader, the total outlay for this position would be $1,451,450 — ($1.45 * 100)*10,010 = $1,451,450. For this trade to reach breakeven, JNPR would need to rally about 10.8%, to $17.60 per share, from the stock’s Monday close of $15.88 per share before the options expire on March 20. The maximum loss on this position is limited to the initial investment of $1,451,450.
By entering this trade, the investor is indicating that he expects JNPR to rally sharply during the next several weeks. The stock has gained some ground amid today’s broad market selling pressure, gaining about 1% at last check. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
Technically speaking, JNPR finds itself in a tough position. The shares have plunged more than 57% since their October 2007 high near $37.95, despite weakness in market rival Cisco Systems (CSCO). What’s more, the equity is fighting a losing battle with overhead resistance at its 10-week and 20-week moving averages. The shares have not closed a week above this duo since mid-September. Furthermore, the shares have been content to remain range-bound between the 15 and 19 levels since the beginning of October.
That said, the stock was recently rejected by overhead resistance at its 20-week moving average, and appears poised to test support at the lower rail of this channel. Should the 15 level break under amplified selling pressure, we could see JNPR retest its November lows near $13 per share.
The Sentiment Drivers
Investor sentiment largely reflects JNPR’s poor technical backdrop. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.40 ranks above 88% of those taken during the past year, standing in stark contrast to today’s heavy preference for call options. What’s more, the International Securities Exchange and Chicago Board Options Exchange’s 10-day put/call ratio of 3.40 indicates that puts bought to open more than tripled calls bought to open during the past 2 weeks. This ratio currently ranks above 87% of those taken in the prior 52 weeks, underscoring a growing appetite for bearish positions.
Elsewhere, Wall Street analysts are leaning toward the bearish end of the spectrum, as 13 of the 24 analysts following the shares rate them a “hold” or worse, according to Zacks. Meanwhile, short interest jumped by 8% during the most recent reporting period to account for 4.8% of the stock’s total float.
The Verdict?
There is very little for contrarians to take away from JNPR’s technical and sentiment outlooks. The stock is in a long-term downtrend, and investors are reacting accordingly, with a heavy flair for pessimism. That said, I am left to wonder if today’s spike in call volume could be smart money ahead of a potential benefit for JNPR from the stimulus package.
Then again, this attention to call-buying could be more an expression of hope that JNPR simply must rally following passage of the Obama stimulus package. There has been quite a bit of this type of speculation toward the market as a whole in recent weeks, and the contrarian in me is betting on a “sell on the news” type event once the smoke clears. Those JNPR bears looking to capitalize on such an event might want to consider a March 19 put.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.