Bears want to pounce on Rackspace


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Rackspace Hosting is at a resistance level, and the bears are ready to pounce.

optionMONSTER's Depth Charge tracking program detected the purchase of about 3,900 November 37 puts for $3.10 to $3.20 and the sale of an equal number of December 25 puts for $0.55. Volume was more than 25 times open interest in both strikes.

The trade resulted in a debit of about $2.60 and has the potential to earn a maximum profit of 360 percent if the data-hosting stock falls to $25 by Nov. 18 and then holds that level. Known as a diagonal put spread , the strategy uses the additional income from selling longer-dated contracts to cut its cost basis and thus increase leverage.

The transaction is an example of how investors can turn time into money using options. (See our Education section)

RAX is up 0.42 percent to $37.92 today but has been drifting lower since early July. It now seems to be stalling around $38, which could be an important level because it provided support in June. It's also the same area where the 50-day moving average is now pushing below the 200-day average, which could lead some chart watchers to believe that a downtrend is taking shape.

The bearishness has occurred despite RAX beating estimates on the top and bottom lines the last time it reported earnings on Aug. 4. The company's next quarterly release is scheduled for Nov. 7.

Overall option volume is 12 times greater than average so far today, with puts outnumbering calls by 24 to 1.

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

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