Cavium draws three-way bullish play


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One investor is betting that the tide is turning for Cavium Networks.

The maker of networking chips has repeatedly issued weak guidance in the last three months amid a slowdown in enterprise spending. It has nonetheless managed to hold its ground around the same $25-$30 area where it consolidated during 2010.

A large three-way trade lit up the Heat Seeker yesterday, reflecting a belief Cavium will rally. A block of 3,000 February 33 calls was bought for $2.09 while equal numbers of February 27 puts and February 37 calls were sold for $0.56 and $0.63 respectively. Volume was more than 10 times open interest in all three strikes.

The trade cost $0.90 and will earn a maximum profit of 1,011 percent if the stock closes at or above $37 on expiration. It will also lose money below $27.

CAVM rose 5.33 percent to $33.02 yesterday. While it's been trapped in a range since the market crashed in August, the stock has recently been rising steadily and is up more than 20 percent from its lows in mid-December.

The company made a presentation at the Needham Growth Conference on Jan. 10 and will probably issue full-year results for 2010 later this month, although the release date has not yet been announced.

Yesterday's bullish trade pushed overall option volume in the name to 14 times greater than average.

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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