What Do These Put Buyers Know?

01/19/2012 6:00 am EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Shares of Cirrus Logic (CRUS) have trounced the broad markets in recent weeks, and while call volume has surged, undeterred short players who are simply hedging their bearish bets may be behind it.

Cirrus Logic (CRUS) is on pace to end the week—and month—notably higher, thanks to the chipmaker’s relatively solid quarterly sales forecast, which hit the Street on January 9.

What’s more, in light of its advance, the stock has emerged as a fan favorite among call buyers.

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During the past six sessions, speculators on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have bought to open more than 7,000 CRUS calls, compared to just 354 puts, resulting in a five-day call/put ratio of 19.92.

Going back even further, the security sports a ten-day call/put volume ratio of 20.97 on the ISE, CBOE, and NASDAQ OMX PHLX, which registers in the 95th percentile of its annual range. In other words, options players have initiated bullish bets over bearish at a near-annual-high pace during the past couple of weeks.

As a result, the security’s Schaeffer’s put/call open interest ratio (SOIR) has retreated in recent weeks. Now, the stock sports a SOIR of 0.37, indicating that calls nearly triple puts among options slated to expire within three months. Plus, this ratio ranks in the 36th annual percentile, underscoring our theory that the near-term options crowd is more call heavy than usual at the moment.

However, it’s worth noting that short sellers have also upped the ante on CRUS lately. In fact, short interest increased by 15.3% during the most recent reporting period and now represents more than a week’s worth of pent-up buying demand at CRUS’ average daily trading volume.

As such, and considering peak call open interest in the front-month series sits at the deep-out-of-the-money January 30 strike, the simultaneous influx in long calls and short interest could suggest the bears are hedging their bets with bullish options.

As alluded to earlier, CRUS has been a broad-market standout on the charts lately, outperforming the S&P 500 Index (SPX) by about 21.5% during the past 20 sessions.

Furthermore, the shares are on pace to finish the month north of their ten-month moving average for the first time since last March. This long-term trend line led the equity significantly higher from mid-2009 until earlier this year and could resume its role as support.

However, in light of the stock’s technical prowess of late, its Relative Strength Index (RSI) sits at a lofty 76—in overbought territory—suggesting a short-term pullback could be in the cards for CRUS... and put buyers are counting on it.

From a contrarian perspective, though, the security’s fundamental and technical achievements—juxtaposed with elevated levels of short interest—could bode well for CRUS. Should the stock continue its journey into the black, a short-covering situation could add fuel to the equity’s fire.

By Andrea Kramer, contributor, Schaeffer’s Research

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