Options Corner: Smart Money Traders Charge In as Arista Networks Hits Potential Bounce Signal

A leading provider of cloud networking solutions, Arista Networks Inc ANET commands strong relevance. Thanks to its focus on high-speed Ethernet switches and routers designed for data centers, cloud computing environments and enterprise networks, Arista forms the backbone of modern cloud services. Unfortunately, competitive pressures combined with uncertainty over President Donald Trump's trade policies have negatively impacted ANET stock. Recently, though, sentiment across the board is shifting.

Earlier this week, Rosenblatt analyst Mike Genovese upgraded ANET stock to Neutral from Sell, while also raising the price target to $85 from the prior forecast of $55. On the color commentary side, CNBC's Jim Cramer pounded the table on ANET last week when the security was trading hands at $70, noting that the stock was "down way too much."

With ANET stock rapidly approaching the $92 level at time of writing, the natural inclination is to believe prospective traders are late to the party. However, data from the smart money suggests otherwise. Earlier today, Benzinga's options scanner identified unusual activity in the derivatives arena, with a particular focus on bullish sentiment transactions.

Two factors immediately stood out. First, all of the trades identified as bullish were call options, meaning that they represent debit-based transactions. In other words, traders pay a debit under the assumption that a future event will materialize. By logical deduction, the security must rise to meet minimum profitability thresholds.

Second, the debit calls were all sweep transactions. Essentially, sweeps represent the institutional version of the market order, which emphasizes transaction speed over extracting the best (lowest) premium price. Therefore, it's reasonable to assume that the smart money was in a hurry to position themselves for additional upside.

In the near term, that moment can arrive next Tuesday after the closing bell when Arista discloses its first-quarter earnings report. Stronger-than-expected results or even an encouraging outlook could potentially send ANET stock northward.

Market Demand Profile for ANET Stock Incentivizes Speculation

In the film "Limitless," the plot revolves around a super drug that greatly enhances intelligence — so much so that the main character develops a remarkably accurate and profitable stock forecasting system. To leverage his trading power, though, the protagonist turns to a loan shark for accelerated funds, setting up a central conflict in the narrative.

Of course, the film is preposterous. The loan shark is actually the smart one.

Such shady characters that live on the fringes of organized crime operate by discrete principles: compliance or consequences. That's it. And it's the same principle undergirding market sentiment. At the end of any given period, investors are either a net buyer of a security or they are not.

The fantasy depicted in "Limitless" is that patterns can be deciphered in the scalar continuous signal known as the share price. That would seem to be a practically impossible task. What's much more reasonable is to consider price as defined, discrete events that transition from one state of existence to another.

For example, in the past 20 weeks, ANET stock printed two sets of "4-6" sequences: four weeks of upside interspersed with six weeks of downside, with a negative trajectory across the period. The last time this down-week-dominated trend materialized roughly two years ago, ANET enjoyed an extended bull run.

Also, it's worth pointing out that historically, the upside probability one week after the 4-6 sequence flashing stands at 68%. This stat suggests that investors tend to buy the dips in ANET stock. Assuming the positive pathway continues to hold, the projected upside target based on historical median trends would be around $97 to $98.

On the other hand, near-term risk exists between $88 to $89 under "normal" circumstances. With earnings next week, traders should be cognizant of the possibility of ugly surprises.

An Aggressive Bet for Impatient Traders

As prior trends suggest, ANET stock could see an early rise as a response to the 4-6 sequence, followed by a possible broad tapering effect in the later weeks. Therefore, traders who believe in the recurrence of behavioral dynamics may consider the 92/95 bull call spread expiring May 23.

This is an aggressive but rational wager based on the potential capabilities of ANET stock, involving the buying of the $92 call and simultaneous selling of the $95 call. Subsequently, the proceeds from the short call partially offset the debit paid for the long call, resulting in a net debit paid of $150. Should ANET rise through $95 at expiration, the maximum reward is also $150.

The beautiful part about this trade is that the security should be able to reach around $97 within the aforementioned time period, thus possibly providing some buffer.

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