Options Activity for Brocade Communications Systems (BRCD), H&R Block (HRB) & VeriSign (VRSN)
Wednesday, September 01, 2010



I hope that your trading is going well, as I know that members of S.O.M.E. are making the most of the market movements and their returns.



This newsletter looks at the accelerated call trading on Brocade Communications Systems (BRCD), a jump in put trading on H&R Block (HRB) following brokerage comments, and an increase in put trading on VeriSign (VRSN).

Brocade Communications Systems (BRCD)

Options players jumped on Brocade Communications Systems Inc. (BRCD) on Tuesday, as more than 64,100 contracts crossed the tape. This surge in volume was more than triple the equity's average daily trading volume of 19,109 contracts, according to data from WhatsTrading.com. In addition, options players were feeling quite optimistic, as 92% of the volume crossed on the call side.



The International Securities Exchange (ISE) has seen brisk call trading on the security recently. During the past 10 trading sessions, 131 calls have been purchased to open for every one put purchased to open. This ratio of calls to puts is higher than 97.5% of all the readings taken during the past 12 months, pointing to a rising optimism.

However, there is still ample room for optimism to gain ground. The put/call open interest ratio (SOIR) for BRCD comes in at 1.16, as put open interest outnumbers call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 86% of all those taken during the past 12 months. In other words, short-term options players have been more pessimistically aligned toward the shares only 14% of the time during the past 52 weeks.

Furthermore, Wall Street is unenthusiastic. According to Zacks, the stock has earned 11 "buy" ratings and 16 "holds." Considering the stock's lackluster technical performance, there is ample room for potential downgrades that could weigh negatively on the shares.

Technically speaking, the shares of BRCD have shed more than 34% since the beginning of the year. The security was rejected by resistance at the 9.80 level in mid-November, and has since drifted lower under pressure from its 10-week and 20-week moving averages.



H&R Block (HRB)

The shares of H&R Block Inc. (HRB) dropped on Tuesday on worries about the tax-preparation company's mortgage portfolio. With first-quarter results expected Thursday, Northcoast Research analysts urged HRB to "be more transparent" and give investors enough information to confidently value the stock. Also, a great deal of uncertainty surrounds the company's strategy to compete with popular do-it-yourself tax programs like Intuit's (INTU) TurboTax. In fact, Morningstar stated that HRB "shot itself in the foot" when it failed to quickly develop a do-it-yourself product, and needs to catch up to the competition.

Traders responded by jumping on the stock's options, sending more than 51,600 contracts across the tape. This surge in volume was nearly 20 times the stock's average daily trading volume of 2,589 contracts, according to data from WhatsTrading.com. Furthermore, investors were quite skeptical, as 87% of the volume changed hands on the put side.



Puts have been the option of choice on HRB recently. The ISE reports that 3.7 puts have been purchased to open for every one call purchased to open during the past 10 trading sessions. This ratio of puts to calls is higher than 80% of all the readings taken during the past 52 weeks, pointing to a rising skepticism.

What's more, the SOIR for HRB comes in at 0.92, as put open interest nearly equals call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 67% of all those taken during the past 12 months. In other words, short-term options players have been more pessimistically aligned toward the shares only one-third of the time during the past 52 weeks.

Wall Street is giving the stock the cold shoulder, as four of the six analysts following HRB rate it a "hold."

From a technical perspective, the shares of HRB are down sharply since the beginning of the year. The equity has rolled over from its near-term peak of 23.23, and is now falling under resistance at its 10-week and 20-week moving averages.



VeriSign (VRSN)

VeriSign Inc. (VRSN) was the center of some brisk options trading yesterday, as the stock saw more than 24,900 contracts change hands. This surge in volume was more than four times the stock's average daily trading volume of 5,525 contracts, according to data from WhatsTrading.com. What's more, roughly 95% of the volume changed hands on the put side.



Yesterday's preference for puts runs counter to the trend that we've seen on the ISE and Chicago Board Options Exchange (CBOE). During the past 10 trading sessions, the two exchanges have traded more than seven calls for every one put purchased to open. This ratio of calls to puts is higher than 75% of all those taken during the past 12 months.

On the other hand, the SOIR for VRSN comes in at 0.64, which is higher than 68% of all those taken during the past year, pointing to some lingering pessimism. In fact, traders have been more pessimistically aligned only 32% of the time during the past 12 months.

Digging deeper into the stock's sentiment backdrop, we find that short sellers have started to unload their pessimistic positions. During the past month, the number of VRSN shares sold short decreased by 7% to 14 million. However, more than 8% of the company's float remains sold short. A continued unwinding of these positions could help to fuel a significant rally in the shares.

Furthermore, Wall Street is optimistic. According to Zacks, the stock has earned 11 "buy" ratings and six "holds." Keep in mind that there is still some room for upgrades considering the equity's impressive technical performance.

Technically speaking, the shares of VRSN are up more than 20% since the start of 2010. The equity has staged a stellar rally along the support of its 10-week and 20-week moving averages since July 2009. The security is now battling round-number resistance at the 30 level.





Success is simple. Do what's right, the right way, at the right time.




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