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Option Activity Alert: Acme Packet, Inc. and Biodel Inc.

By: Schaeffer's Investment Research
Posted: 10/28/2010 11:25:00 AM
Referenced Stocks: APKT;BIOD

Traders rushed to place their bets on Acme Packet, Inc. ( APKT ) and Biodel Inc. ( BIOD ) on Wednesday, with option volume rising well beyond the norm for both stocks. Speculators are scooping up bearish bets ahead of APKT's turn in the earnings spotlight, while calls have gained popularity as BIOD awaits a highly anticipated regulatory decision.

Acme Packet, Inc.

Puts were unusually popular on APKT yesterday, with volume surging to roughly four times the expected level. A total of 6,822 puts changed hands on the stock during the course of Wednesday's session, compared to just 2,211 calls.

On the International Securities Exchange (ISE) alone, speculators on Wednesday bought to open 2,752 puts on APKT, compared to 134 calls. The security's single-day ISE put/call volume ratio of 20.54 indicates a clear bias toward bearish bets over their bullish counterparts.

Yesterday's skeptically skewed action simply continues a recent trend for APKT, which now sports an inflated 10-day ISE put/call volume ratio of 2.45. This reading ranks above 90% of other such ratios taken during the previous year, as traders have purchased puts over calls at a faster clip just 10% of the time.

In fact, APKT's Schaeffer's put/call open interest ratio (SOIR) of 2.73 reveals that puts nearly triple calls among options slated to expire within three months. This ratio arrives in the 80th percentile of its annual range, suggesting that short-term options players have been more bearishly aligned just 20% of the time.

Short sellers also maintain a noteworthy stake in APKT, despite a 40% decline in short interest during the past month. These pessimistic positions still account for 5.3% of the equity's float, as plenty of skeptics are still betting on the stock to slide.

This heavy-handed pessimism is remarkable, when you consider the fact that APKT has surged nearly 266% year-to-date. The shares tapped a fresh annual high of $40.99 earlier today, extending a lengthy uptrend along the support of their 10-week and 20-week moving averages.

Weekly Chart of APKT since August 2009 With 10-Week and 20-Week Moving Averages

However, in light of the stock's impressive price action, it's actually possible that APKT investors are responsible for the recent uptick in put volume. By purchasing puts on the stock, shareholders can lock in some paper profits and ensure a favorable exit price on their stake, even if APKT should swallow a drastic downturn on the charts.

The company's looming quarterly report could have easily inspired an urge to hedge, as APKT is slated to take the earnings stage after tonight's closing bell. Analysts are looking for a third-quarter profit of 19 cents per share, up from 9 cents in the year-ago period. APKT has topped Wall Street's consensus profit expectations in each of the past four quarters.

Biodel Inc.

BIOD drew a heavy dose of call volume on Wednesday, with activity climbing to three times the expected level. Approximately 14,000 calls changed hands during the course of the session, compared to the equity's average daily call volume of about 4,500 contracts. Meanwhile, only 5,350 puts were exchanged during the course of the session.

Data from the ISE confirms a strong bias toward bullish bets on BIOD. On Wednesday, traders on the exchange bought to open 1,099 calls and just 45 puts, netting the shares a single-day ISE call/put volume ratio of 24.42.

Taking a slightly longer-term look, BIOD has now garnered a 10-day ISE call/put volume ratio of 3.51. This ratio arrives in the 83rd percentile of its annual range, indicating that speculators have scooped up calls over puts at a faster-than-usual pace in recent weeks.

However, it's worth noting that short interest on BIOD surged by 48.3% during the past month, and shorted shares now account for a lofty 26.8% of the equity's float. With short interest and buy-to-open call volume rising in tandem, it's possible that traders are using calls to hedge their bearish bets.

Speculation is heating up on BIOD ahead of a key Food and Drug Administration (FDA) decision, with the agency set to review the firm's injectable diabetes treatment at the end of this week. Judging by the equity's recent price action, BIOD could definitely benefit from a favorable ruling -- since Sept. 30, the stock has blazed a path lower under pressure from its 10-day moving average.

Daily Chart of BIOD since September 2010 With 10-Day Moving Average