Analog Devices Option Trader Bets $500,000 On Earnings Miss

Analog Devices, Inc. ADI shares are down 4.5% in the past week, but at least one larger option trader is betting on more downside from the chip maker ahead of its third-quarter earnings report.

The Trades

On Wednesday morning, Benzinga Pro subscribers received two option alerts related to unusually large Analog Devices trades.

• At 9:36 a.m., a trader bought 1,817 Analog Devices put options with a $110 strike price expiring on Nov. 29 near the ask price at $2.80. The trade represented a $508,760 bearish bet.
• At 9:46 a.m., a trader sold 825 Analog Devices put options with a $95 strike price expiring on Jan. 17, 2020 near the bid price at $1.076. The trade represented an $88,770 bullish bet.

Why It’s Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest sizes of Wednesday’s Analog Devices option trades by institutional standards, they are unlikely to be institutional hedging.

Analog Devices Earnings Setup

With Analog Devices earnings due out on Nov. 26, the strike price of the puts purchased on Wednesday suggests more than 2% additional earnings downside given the highest break-even price of the puts is $107.20.

Analog Devices traders may also be getting bearish on the stock’s longer-term outlook given a recent deterioration in trade war negotiations. Management cited “uncertainty in the trade tensions between America and China” as one of the factors contributing to a lack of clarity in its guidance.

Benzinga’s Take

Investors may be cautious about going all-in on Analog Devices given the ongoing near-term uncertainty surrounding the economic impact of the trade war in China. The silver lining in Wednesday’s option market trading is that the smaller, bullish January 2020 put sales suggests at least some traders see longer-term downside for Analog Devices as limited.

Given the broad semiconductor market hasn’t shown much improvement, Analog Devices investors likely need big growth numbers next week in 5G devices and electric vehicles to exceed market earnings expectations.

The stock traded around $108.81 per share at time of publication.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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