Adtran facing downside strategy


Adtran is showing signs of a potential bearish reversal, and one investor is positioning for a drop.


adtn optionMONSTER's Depth Charge tracking system detected the purchase of about 2,500 July 25 puts for $0.35 to $0.40 and the sale of a matching number of August 30 calls for $0.40. The trade resulted in a small credit and pushed total options volume in the networking stock to 15 times more than average.


ADTN fell 1.20 percent to $27.24 on Friday and has spent the last four months consolidating between $25 and $30. Shares of the networking technology company gapped to a four-year high of $29.92 in mid-April after issuing a strong earnings report and providing a bullish second-quarter forecast.


However, it gapped lower six sessions later and since then has been unable to regain those levels. Some traders may interpret the price action as an "island reversal" chart pattern and expect the next move to be lower.


Friday's option trade is designed to leverage such a move and will generate profit if ADTN closes below $25 by July 16. The investor took the unusual step of selling calls that expire one month later and is therefore at risk of losing money if the shares rally above $30 by August expiration.


Selling longer-dated calls allowed the trader receive a higher premium to finance the purchase of the puts. The decision reflects a belief the shares will push lower in the near term and stay down.


The date of the next earnings release hasn't yet been announced but will probably be soon because the last one was on April 14.


(Chart courtesy of tradeMONSTER )


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

Referenced Stocks: ADTN



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