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ARM Holdings Traders Prepare for Post-Earnings Struggles


ARM put buyers may be locking in portfolio gains.

The shares of ARM Holdings plc (ADR) (NASDAQ:ARMH) are approaching a familiar speed bump in the $29-$30 neighborhood, which has limited the stock's upside for the better part of two years. Against this backdrop, and ahead of today's turn in the earnings confessional, it looks like the options crowd is gambling on a short-term pullback for the tech concern.

Around midday yesterday (October 22), ARM had already seen more than 4,400 puts change hands -- about nine times its average intraday put volume, and more than six times the number of ARM calls exchanged. Most popular was the out-of-the-money November 26 put, which as of yesterday, has seen close to 4,250 contracts traded on open interest of fewer than 200 contracts, hinting at a surge in new initiations. What's more, 79% of the newly front-month puts have crossed at the ask price, suggesting they were bought.

The put buyers' goal is for ARM to backpedal beneath the $26 level within the next few weeks. More specifically, the volume-weighted average price (VWAP) of the puts is $0.45, meaning the buyers will reap a reward if ARM breaches the $25.55 level (strike minus VWAP) within the options' lifetime.

On the other hand, considering ARMH has muscled about 30% higher since skimming the $22 level in mid-July, the buyers could be insuring their ARMH shares. By purchasing protective puts on the stock, the traders can guarantee the least they receive for their ARMH shares is $26 apiece, should the equity embark on a post-earnings selling spree. As such, the put buyers are shareholders first and options traders second, meaning their primary goal is for ARMH to extend its upward momentum of late, and for the puts to remain out of the money.

Whatever the motive, today's affinity for long puts is just more of the same. During the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), ARMH has racked up a put/call volume ratio of 1.44 -- in the 73rd percentile of its annual range. In other words, option buyers have scooped up ARMH puts over calls at a faster-than-usual clip lately. In the same vein, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.86 stands higher than 72% of all other readings of the past year, pointing to a bigger-than-usual put-bias among short-term speculators.

However, that skepticism isn't limited to the options pits. Short interest on the security jumped nearly 11% during the past month, and now represents about four sessions' worth of pent-up buying demand, at ARM's average pace of trading.

As alluded to earlier, ARM has spent the past few months ascending atop its 10-week moving average, but is now facing a potential wall in the $29-$30 region. Historically, the firm has topped analysts' bottom-line earnings estimates in each of the past four quarters, according to Thomson Reuters. Another positive earnings surprise could spook the lingering skeptics on the Street, sparking a contrarian tailwind.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
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