The 'sell' signal that's flashing now has never been wrong
The shares of optical components maker Finisar Corporation (NASDAQ:FNSR) have added 7.5% in the past week. However, FNSR stock is flashing a historic "sell" signal on the charts -- and the bearish alarm has yet to be wrong. As such, now might be the time to consider short-term puts on the security.
Jumping right in, Finisar shares are now within one standard deviation of their 200-day moving average, after a lengthy stretch below this trendline. There have been five similar signals of this kind in the past, after which FNSR went on to sink 4.37%, on average, the subsequent week, per data from Schaeffer's Senior Quantitative Analyst Rocky White. One month later, the stock was lower 100% of the time, down an average of 12.26%.
As you can see on the chart below, the equity has been in a channel of lower highs and lows for roughly one year, with highs kept in check by the 200-day moving average. FNSR shares were last seen down 0.2% to trade at $18.24 -- an area that represents a roughly 25% gain from the security's April closing low of $14.67, and a 10% decline year-to-date. From current levels, another 12.26% pullback would put Finisar stock around $16.
Despite the stock's long-term struggles, Wall Street remains enamored. FNSR still sports six "buy" or better ratings, compared to five lukewarm "holds" and not a single "sell." The consensus 12-month price target of $21.09 represents a premium of nearly 16% to the equity's current price, and stands in territory not charted since March. A round of analyst downgrades or price-target cuts could send the shares reeling again.
Meanwhile, options traders have been picking up FNSR calls over puts at a rapid-fire rate. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 9.92 indicates nearly 10 Finisar calls have been bought to open for every put in the past two weeks. This ratio registers in the 96th percentile of its annual range, pointing to a much healthier-than-usual appetite for bullish bets over bearish of late.
However, short interest represents more than 19% of Finisar's total available float, even after declining 6.6% in the past two reporting periods. Considering FNSR's recent run higher, it's possible some of the aforementioned call buying -- particularly at out-of-the-money strikes -- could be attributable to shorts seeking an options hedge.
Whatever your motive, now is an opportune time to strike on FNSR's near-term options. The stock's Schaeffer's Volatility Index (SVI) of 35% is at the bottom of its annual range, suggesting short-term options are pricing in relatively low volatility expectations for the underperformer.