Big Tech Earnings Season: Here's How Large Options Traders Are Positioning

Tech stocks finished the week strong on renewed optimism for a trade deal with China. Big tech stocks definitely had the attention of some large option traders on Friday.

The Trades

On Thursday and Friday, Benzinga Pro subscribers received dozens of option alerts related to unusually large tech option trades. Here are a handful of the largest:

• On Thursday at 12:17 p.m., a trader bought 1,000 Netflix Inc NFLX call options with a $400 strike price expiring June 19, 2020 at the ask price of $5.951. The trade represented a $559,100 bullish bet.
• On Friday between 10:30 and 10:35 a.m., a trader bought 3,079 Facebook, Inc. FB put options with a $170 strike price expiring Nov. 22 near ask prices ranging from $2.633 to $2.69. The trade represented a $810,700 bearish bet.
• On Friday at 10:17 a.m., a trader bought 1903 Apple, Inc AAPL put options with a $235 strike price expiring Nov. 22 near the ask price at $9.00. The trade represented a $1.71 million bearish bet.
• On Friday at 10:52 a.m., a trader sold 3,103 Microsoft Corporation MSFT call options with a $140 strike price expiring Oct. 25 near the bid price at $3.53. The trade represented a $1.09 million bearish bet.

Calls purchased at or near the ask or puts sold at or near the bid are trades typically considered bullish. Calls sold at or near the bid and puts purchased at or near the ask are typically considered bearish.

Here’s a breakdown of unusually large option trades in each of the four big tech stocks mentioned above over the past two days.

• Netflix: four bullish trades, one bearish trade.
• Microsoft: nine bullish trades, 12 bearish trades.
• Apple: 21 bullish trades, 25 bearish trades.
• Facebook: eight bullish trades, 12 bearish trades.

See Also: What To Expect From Q3 Internet Earnings

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 large number of trades and the large sizes of some of the trades, it is likely at least some of them represent institutional hedges.

Earnings Disappointment Ahead?

The fact that the majority of the large option trades in these big tech stocks to end the week doesn’t bode particularly well as third-quarter earnings season is set to get into full swing next week.

Analysts have some mixed opinions of big tech names ahead of earnings season. The S&P 500 tech sector is expected to report a 10.2% drop in the third quarter, a particularly steep earnings decline. The semiconductor industry is expected to me a major drag on the sector, with consensus analyst estimates calling for a 30% earnings decline.

Benzinga’s Take

Netflix is the only one of the four tech stocks with a bullish skew to its earning trades in the past two days. Not only are Netflix shares down 25% in the past three months, the company has a track record of bouncing back in quarters following subscriber misses.

Apple is heading into earning season trading near all-time highs after gaining 15% in the past three months. Given the stock’s impressive recent performance, bearish traders may be either hedging or taking profits in the stock ahead of the earnings catalyst.