Posted 9/9/2010 (19:45): As noted earlier today (see 1:12 color), NetApp (NTAP) saw an interesting three-way spread today, in which an investor apparently unloaded 5,000 December 45 calls to buy the December 50 – 60 call spread, 5000X. With shares running to a high of $47.89 in morning trading, the investor was probably liquidating a profitable position in the in-the-money calls to open a new bullish position in the out-of-the-money call spread. The action in the stock is interesting as well because it rallied early on news it had settled a lawsuit with Oracle, but finished the day down 10 cents to $46.33.
As we can see from the stock chart below, NTAP has been in a bullish trend for the past year. It has seen an impressive 24 percent rally in less than a month. A lot of the good news in the short-term might be factored into the stock and that’s why it failed to move higher on today’s news. The chart, including RSI, hints at somewhat overbought conditions.
Through December, the bullish trend could very well continue, however, and today’s spread trader might indeed see shares move beyond $50. After all, it looks like they were right on that 5,000 block of Dec 45 call options. Rather than trade the call spread, however, we’ll take a different approach and sell the front-month Sep 48 calls at 50 cents while buying the Dec 50 calls at $2.65. This Sep 48 – 50 diagonal spread, for a $2.15 debit, will perform well if shares hold below $48 through next week’s September expiration and rally that point forward. We might roll into an Oct – Dec 50 time spread once the Seps expire. (Sep 48 – Dec 50 call spread at $2.15 or better.)
Update (9/14, 11:20): NTAP is blowing through resistance and seems like it has a lot of momentum building — not an ideal candidate for a diagonal or calendar spread at this point. We suggest banking a profit on the spread this morning, selling-to-close the Sep 48 – Dec 50 call spread at $2.35 or better.
About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.