Home security solutions provider ADT (ADT) is up nearly 25% over the past year, nearly four times the return of the S&P 500 over the same period. One trader sees shares taking a breather in the weeks ahead.
That’s based on the May $8 puts. With 44 days until expiration, 14,777 contracts traded compared to a prior open interest of 459, for a 32-fold rise in volume on the trade. The buyer of the puts paid $0.40 to make the bearish bet.
ADT shares recently traded for about $8.10, making this an at-the-money trade. The stock has been trending higher in recent months, and is just off a 52-week high of $8.39.
Operationally, the home security services provider has had a mixed year. Revenues are up by 7%, but earnings growth slid by two-thirds. And even after is sizeable gain in the past year, shares are reasonably valued at 12 times earnings.
Action to take: Shares look like a momentum play here, but have been prone to short-term pullbacks. Long-term investors may want to buy a small stake here and add to it on such pullbacks.
For traders, the May $8 puts are inexpensive and could see high double-digit returns or better on a short-term pullback. But longer term, the trend is bullish, so longer-dated calls may be the more attractive option here.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.