Schaeffer's Midday Options Update for Wednesday: Digging into SanDisk
Jocelynn Drake (jdrake@sir-inc.com)
4/7/2004 1:52 PM ET
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The market has spent the session deep in the red following some less-than-heartening earnings news. Alcoa (AA: sentiment, chart, options) has kept blue chips in negative territory after last night's lackluster earnings report. The company posted a profit of 40 cents per share on revenue of $5.7 billion. Meanwhile, analysts had anticipated a profit of 42 cents per share on revenue of $5.59 billion. The firm stated that it missed the consensus estimate due to a delay in the realization of higher aluminum prices, which it expects to have a greater impact in the second quarter. Also among the blue chips, Hewlett-Packard (HPQ: sentiment, chart, options) is down by more than two percent after one brokerage firm trimmed its earnings estimate for the company. The firm cited pricing and weakness in the PC market.
Turning to the tech sector, Seagate Technology (STX: sentiment, chart, options) warned that third-quarter earnings would fall substantially short of the consensus estimate due to weak demand. The company is now forecasting a profit between six and eight cents per share compared to the Street estimate of 21 cents per share. Nokia (NOK: sentiment, chart, options) is still languishing in the red following several downgrades. This flurry of activity follows yesterday's earnings warning.
In other news Kerr-McGee (KMG: sentiment, chart, options) announced plans to acquire Westport Resources for $3.4 billion in stock. KMG expects the deal to add to earnings and cash flow beginning in 2005 and projects a cost saving above $40 million a year before taxes.
The latest economic news has gone relatively unnoticed today. March prices for import goods rose 0.9 percent - marking the sixth consecutive month of gains. Excluding petroleum, prices inched 0.2 percent higher. During the month, petroleum prices gained 6.1 percent. Furthermore, export prices for last month rose 0.9 percent.
At 1:36 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10489.5) is down 0.77 percent and the S&P 500 Index (SPX - 1140.87) is lower by 0.63 percent. The Nasdaq Composite (COMP - 2044.9) is down 0.73 percent. At 1:37 p.m. in the options pits, 1,507,270 calls and 901,422 puts traded for a composite put/call ratio across all five exchanges of 0.59. The CBOE put/call ratio for equity options weighed in at 0.47.
Put activity was brisk on SanDisk's (SNDK: sentiment, chart, options) April 30 strike, with more than 5,600 contracts changing hands. However, with more than 23,200 contracts already open, we will have to wait to see if this surge in put volume was the initiation of new positions or the closing of existing positions. Overall, investor sentiment toward the security has grown more pessimistic. The equity's Schaeffer's put/call open interest ratio has increased from its early-February low of 0.58 to its current reading of 0.86. This increase in the ratio signals that puts (bearish bets) have been added at a faster rate than calls (bullish bets) in the front three months of options. What's more, short interest (another bearish technique) soared 13 percent over the most recent reporting period and has risen 25 percent from its December low.
Technically speaking, the stock rallied along support at its 10-week moving average from its January 2003 low of 7.39 to its November high of 43.15. After pulling back to support at a 50-percent retracement level (near 25), it appears the security it attempting to rebound. SNDK has reclaimed support at its 10-week and 20-week moving averages and has even moved back above its 10-month trendline. This combination of strong technicals and growing pessimism has bullish implications for SNDK from a contrarian perspective.
Traders should also keep an eye out for SNDK's earnings report, which is due out on April 14. The Street is currently forecasting a profit of 31 cents per share, an 82-percent profit over earnings for the same period a year ago. What's more, the company has surpassed the consensus estimate for the past five quarters by an average of 56 percent. Another strong earnings report could add more fuel to the security's rally.
** The tables below reference the most actively traded call and put contracts across all five exchanges.** |
