A computer networking company, Netgear (NTGR) should seemingly be relevant amid the rapid digitalization of society. However, competitive pressures and disappointing financial performances have yielded little but pain for stakeholders of NTGR stock recently. Since the January opener, Netgear lost almost 30% of equity value. In the trailing one-year period, shares stumbled more than 42%.

Still, because of the severe decline in NTGR stock, some contrarians believed that the security could be due for a comeback. On May 9, Barchart content partner Zacks Equity Research noted that “[a]fter declining 24.7% over the past four weeks, the stock looks well positioned for a trend reversal as it is now in oversold territory.”

In addition, the investment resource cited “strong agreement” among Wall Street analysts that Netgear will post better earnings than earlier predicted. Unfortunately, when the company released its second-quarter results, the market wasn’t impressed with the overall performance, even though Netgear printed better-than-expected figures.

Such is the whim of the capital markets. However, while independent analysts seem to have given up on NTGR stock based on its prior disappointments, the network equipment specialist may finally make good on its earlier speculative promise.

Unusual Options Activity Smiles on NTGR Stock

Perhaps most conspicuously, NTGR stock represented one of the top highlights in Barchart’s screener for unusual options activity. Specifically, total volume reached 3,498 contracts against open interest of 7,505 contracts. Further, the delta between the Thursday session volume and the trailing one-month average metric came out to 960%.

Based on this comparison, only five other derivative trades were more unusual than NTGR stock. Looking at the transactional breakdown, call volume hit 3,401 contracts against put volume of 97 contracts. This pairing yielded a put/call ratio of 0.03, on paper significantly favoring the bulls. However, the put/call open interest ratio stands at a stratospheric 1.44, introducing an ambiguous backdrop.

To be sure, investors should avoid acting on any security based on a face-value reading of options transactions. However, with Netgear, you may be able to read into it intuitively: traders may be betting that shares will rise.

Looking at the most unusual activity for NTGR stock on Sept. 14, the Dec 15 '23 15.00 Call arguably stands out the most because of its high volume for the day (3,094 contracts). Also, the open interest sat at 66 contracts, indicating possibly a surge of demand.

Even more enticing, Fintel’s screener for options flow – which filters for big block trades likely made by institutions – shows a single transaction for 3,000 contracts for that very same option, the Dec 15 '23 15.00 Call. Likely, this means a single institutional investor represented 85.76% of total unusual volume for NTGR stock options on Thursday.

The Math Incentivized the Acquisition

Now, one of the tricky matters involving options volume and open interest is the buying and selling of derivative contracts. When a market participant sells (writes) an option, it generally has the opposite implication of buying said derivative. Therefore, you can’t just look at high call volume and assume bullishness.

However, it’s easier to make the case that with the Dec 15 '23 15.00 Call, the transaction was a buy and thus a directional wager. That’s because the math incentivized the purchase of the call, not the writing of it.

You’ll notice that in the target call’s pricing history, from Sept. 5 to Sept. 14, implied volatility (IV) declined from 40.80% to 35.46%. However, the delta during the same period increased from 0.1939 to 0.2425. In other words, the premium declined while the relationship between the $15 call and the underlying stock became tighter. Also, the time decay “penalty” as listed in theta was only minimal.

You got to appreciate what’s going on here. An institutional investor recognized that the price for an option that just got a probability boost of going in the money (ITM) decreased. Of course, that investor is going to pick up the call option! It makes sense in this case to buy the risk.

From a non-trader’s perspective, NTGR stock has been incredibly frustrating. However, it might finally be ready to delight the contrarian bull.

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