Optical networking equipment maker Ciena Corporation (CIEN) has done well during the past year, positioning itself to take full advantage of the fiber revolution going on in the networking and Web 2.0 market space.
With a cadre of customers including Google (GOOGL, GOOG), Amazon.com (AMZN), and Facebook (FB), Ciena has carved out a considerable position in the network hardware space with its latest and greatest 100G equipment rollouts. Furthermore, the company has even won business from wireless giant Verizon Communications (VZ) to expand Verizon’s metro 100G deployment.
As such, growth expectations are impressive for Ciena. Wall Street is currently targeting year-over-year earnings growth of 35%, with per share results of 23 cents expected. Revenue, meanwhile, is seen rising nearly 8% to $604.4 million.
Historically, Ciena earnings have been consistently above board, with the company topping Wall Street’s targets in all but two quarters in the past two years. It should come as no surprise, then, that EarningsWhisper.com reports that Ciena’s second-quarter whisper number arrives 3 cents better than the consensus at 26 cents per share.
This bullish sentiment reading has spilled over into the rest of the brokerage community as well. According to data from Thomson/First Call, 15 of the 21 analysts following CIEN stock rate the shares a “buy” or better, with only one “sell” rating on the docket. That said, there is room for improvement, with the 12-month price-target of $26 per share resting a mere 8.3% above CIEN’s Monday close at $24.05.
On the other hand, short sellers have loaded up on bets against CIEN stock. Currently, more than 16 million shares of CIEN stock are sold short, representing more than 15% of the stock’s total float, or shares available for public trading.
From a contrarian perspective, this massive short position could provide fuel for a short-covering rally if Ciena second-quarter earnings arrive stronger than expected.
Turning to options activity, CIEN has attracted a flood of short-term call open interest in recent weeks. The stock’s weekly June 5 series put/call open interest ratio has trended steadily lower during the past couple of weeks, arriving today at a bullish reading of 0.53. This ratio trends even lower when we pull back to the monthly June series, arriving at 0.41, with calls more than doubling puts among options set to expire within the next month.
Traders looking to gauge CIEN sentiment readings should remember that the stock’s short-term call activity could be less an indication of expected direction and more of a hedge for short sellers. Specifically, short sellers often buy call options ahead of events, such as earnings, as a hedge against sharp upside moves in the shares. This locks in a better exit price for their short position, allowing them to limit losses and avoid chasing a soaring stock.
Click to EnlargeOverall, weekly June 5 series implieds are pricing in a potential post-earnings move of about 7.2%. This places the upper bound at $25.72, while the lower bound lies at $22.28. A post earnings rally could put CIEN stock on a collision course with its 2013-2014 highs near $27, while a selloff should find support in the $22.60 region, which is home to CIEN’s 20-day moving average.
2 Trades for CIEN Stock
Call Spread: With the company firing on all cylinders in the 100G marketplace, and hardware expansion and upgrades expected to continue as a steady pace to meet growing broadband demand, Ciena remains an attractive investment opportunity. For short-term options traders however, that build up of short interest looks like a potential powder keg that could go off following a solid report or better-than-expected guidance.
As such, those traders looking to bet on a sharp post-earnings rally for CIEN might want to consider a June 24.50/26 bull call spread. At last check, this spread was offered at 37 cents, or $37 per pair of contracts. Breakeven lies at $24.87, while a maximum profit of $1.13, or $113 per pair of contracts, is possible if CIEN closes at or above $26 when June options expire.
Put Sell: On the other hand, CIEN stock can be a bit unpredictable, and guidance has been flat for technology companies this quarter. Still, those with a bullish-to-neutral bias on CIEN could still bank a handy profit by considering a weekly Jun 5 series $22 put sell position.
After the close last night, this put was bid at 20 cents, or $20 per contract. The upside to this put sell strategy is that you keep the premium as long as CIEN stock closes above $22 when these options expire at the end of the week. The downside is that should CIEN trade below $22 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $22 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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