Bears stacking up puts in Rackspace

By David Russell,

Shutterstock photo

Bears are looking for a pullback in Rackspace Hosting as it trades near all-time highs.

optionMONSTER's Depth Charge monitoring system detected the purchase of 5,000 February 42 calls for $2.55 and the sale of an equal number of February 36 puts for $0.80. Volume was more than 58 times open interest in both strikes.

The trade cost $1.59 per contract bought and will earn 277 percent if RAX closes at $36 on expiration. It was probably the work of an investor who wants to hedge a long position in the cloud-computing name.

Given that 1,000 more puts were sold than bought, however, the trader will be forced to buy 100,000 shares for $36 if it falls below that level. This investor may be willing to do that anyway if he or she is a long-term owner.

The strategy is a variant of a bearish put spread . (See our Education section)

RAX is up 0.25 percent to $43.42 today. It's up 22 percent in the last three months and back near levels where it peaked in April, which could be leading some chart watchers to expect a drop.

Overall option volume is 4 times greater than average in the name so far today, with puts outnumbering calls by 77 to 1. according to the Depth Charge.

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

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

This article appears in: Investing Options
Referenced Stocks: RAX

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