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Option Trends: JDS Uniphase, Netflix, and Rackspace Hosting


Calls are the options of choice on JDSU and NFLX, while put players target RAX.

Options traders have been revealing a strong sentiment slant toward the shares of communications equipment concern JDS Uniphase Corporation (JDSU - 8.81), online entertainment issue Netflix, Inc. (NFLX - 79.73), and cloud computing stock Rackspace Hosting, Inc. (RAX - 42.51).

Call volume has been dominating the tape on JDSU and NFLX, while puts have been gaining popularity on RAX. Here's a closer look at the latest trends in the options pits for these three hot stocks.

Over the past five sessions, traders on the International Securities Exchange ("ISE") and Chicago Board Options Exchange (CBOE) have bought to open 1,704 calls on JDSU, compared to just 56 puts. The resulting five-day ISE/CBOE call/put volume ratio of 30.43 points to a strong bias toward bullish bets over bearish.

JDSU now sports a 10-day call/put volume ratio of 7.08, according to cumulative buy-to-open data from the ISE, CBOE, and NASDAQ OMX PHLX (PHLX). This ratio ranks higher than 87% of other such readings taken during the previous year, implying that speculators have purchased calls over puts at a faster pace only 13% of the time.

Meanwhile, short interest has been on the decline, with the number of JDSU shares sold short dropping by 8.3% during the most recent reporting period. These pessimistic positions still account for a respectable 4.5% of the equity's float.

Traders might be looking ahead to JDSU's fiscal fourth-quarter earnings report, which is tentatively scheduled for the third week in August -- just before front-month options expire. The company has topped consensus bottom-line estimates in three of the past four quarters.
However, the technical picture is less encouraging. JDSU is down nearly 11% year-to-date, with the stock finding resistance at its 10-week, 20-week, and 80-week moving averages. The shares have also broken below the $9 level, which has played a key role as support since early 2010.

Calls are also in play on NFLX, with 5,505 of these bullishly oriented options bought to open on Friday alone -- compared to just 2,869 puts. The resulting ISE/CBOE/PHLX call/put volume ratio of 1.92 indicates that bullish bets nearly doubled their bearish counterparts.
In fact, call buying on NFLX is hovering near annual-high levels. The stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 2.14 registers in the 99th annual percentile, as speculators have shown a greater preference for calls over puts just 1% of the time during the past year.

Likewise, the 50-day ISE/CBOE/NFLX call/put volume ratio for NFLX is 1.49, which also registers in the 99th annual percentile.
Elsewhere on Wall Street, short sellers have started to hit the exits. Short interest declined by 10.1% during the most recent reporting period, but still accounts for a sizable 23.5% of the stock's float. With NFLX shares gaining about 31% from their June lows near the $60 level, it's quite possible that the remaining shorts have been buying call options as hedges.

The shorts don't need to panic just yet, as NFLX's latest rally attempt was halted by its 20-week moving average, which is currently docked near the $85 level. The stock hasn't closed above this trendline since April 20. However, with the company due to confess its second-quarter earnings after Tuesday's closing bell, it makes sense for the shorts to hedge their bets against an upside surprise.

Finally, put players have taken an interest in RAX. Over the past five sessions, options traders on the ISE and CBOE have bought to open 3,525 puts on the tech stock, along with only 229 calls. In other words, these speculators have purchased 15.39 times more puts than calls over the past week.

In fact, the Schaeffer's put/call open interest ratio (SOIR) for RAX currently checks in at 2.05, with puts more than doubling calls among options slated to expire within three months. This ratio ranks above 84% of comparable readings taken over the past year, pointing to a greater-than-usual preference for puts among short-term options traders.

Shorts are also looking for the stock to slide, as short interest currently accounts for nearly 11% of RAX's available float -- or 5.4 times the equity's average daily trading volume.

This surge in bearish speculation could be related to a recent breakdown in RAX shares, which are in danger of ending July beneath their 10-month and 20-month moving averages. This would mark the first time ever the stock has finished a month beneath both trendlines. For the record, the company is scheduled to report second-quarter earnings on Tuesday, Aug. 7.

This article by Elizabeth Harrow was originally published on Schaeffer's Investment Research.

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