Options Trade of the Day: Akamai Technologies Trader Bets on a Post-Earnings Decline

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Shares of Akamai Technologies Inc. ( AKAM ) have plunged more than 11% so far today, as traders reacted to the company's second-quarter earnings report. For the record, AKAM said that earnings rose to 20 cents per share from 19 cents per share in the year-earlier period. Adjusted earnings were 34 cents per share, arriving in line with analyst expectations. Despite the benign results, there were issues that concerned investors and analysts alike. In fact, three brokerage firms cut their price targets on the security.

"We are somewhat concerned about the apparent disconnect between Akamai's media and entertainment revenue growth, which is underperforming industry data points," said analysts at Maxim Group in a research note.

Looking to take advantage of the tumultuous price action, one options trader jumped at a chance to profit from continued AKAM losses.

Daily chart of AKAM since April 2010

Overall, AKAM's options volume was heavily put-centric today, with more than 5,500 of these bearishly oriented contracts changing hands so far, more than quadrupling the stock's daily average. The most popular strike on the session has been AKAM's November 38 put, where about 4,500 contracts have traded.

While taking a closer look at this volume, I stumbled across what appears to be a bearish debit spread on AKAM. Specifically, a block of 4,000 November 32 contracts, marked "spread," traded on the New York Stock Exchange (NYSE) at 1:57 p.m. for the bid price of $1.52, or $152 per contract, indicating that the contracts were most likely sold to open.

The second leg of this position was found on the November 38 put, as a block of 4,000 contracts traded at the same time on the same exchange for the ask price of $3.75, or $375 per contract. This block, too, was marked "spread." Given this data, we could be looking at the initiation of a vertical put spread, or a debit spread , on Akamai Technologies.

AKAM option volume details

The Anatomy of an Akamai Technologies Vertical Put Spread

Breaking down this vertical put spread, the trader would have purchased 4,000 November 38 puts for a total outlay of $1.5 million -- (3.75 * 100) * 4,000 = $1.5 million. The second leg of the debit spread helps to offset the cost of the overall position. Specifically, the trader sold 4,000 November 32 puts for a total credit of $520,000 -- (1.52 * 100) * 4,000 = $608,000. Combining this leg of the trade with the purchased November 38 put lowers the total cost of the entire position to $892,000 -- $1,500,000 - $608,000 = $892,000.

The addition of the sold November 32 put also lowers breakeven on the trade. To arrive at breakeven, we subtract the credit received from the sold November 32 put from the debit incurred by purchasing the November 38 put. Doing so, we arrive at a cost of $2.23 - $3.75 - $1.52 = $2.23 -- or $223 per contract. As a result, breakeven for the position rests at $35.77 per share, with the trader now needing AKAM to fall roughly 7.8% from its current perch near $38.84.

AKAM vertical ratio put spread details

The maximum profit on the combined legs of the long vertical put spread is calculated by subtracting the total debit paid from the difference between the sold November 32 strike and the purchased November 38 strike. In this case, the maximum profit is $3.77 -- (38 - 32) - 2.23 = $3.77 -- and is reached if AKAM drops to $32 per share when the options expire. Below is a chart for a rough visual representation of the trade's profit/loss scenario:

AKAM vertical ratio put spread profit/loss chart

Implied Volatility

After the vertical put spread has been entered, increasing implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold option and the purchased option. At the time of the trade, implieds for the November 32 put were 50.93%, while the implied volatility for the November 38 put was 47.69%. For comparison, AKAM's three-month historical volatility was perched at 56.20% as of the close on Thursday.

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This article appears in: Investing , Options

Referenced Stocks: AKAM

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