Shares of Akamai Technologies Inc. (
) 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
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
, on Akamai Technologies.
The Anatomy of an Akamai Technologies Vertical Put
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
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:
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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