Call Options Or Put Options On Rackspace Hosting (RAX)?

| September 17, 2014 | 0 Comments

cloud computingCloud computing services company Rackspace Hosting (RAX) has been quite volatile this week. The company recently decided not to be acquired by a bigger company after doing its due diligence.

RAX shares are currently trading at $33.05, down 16% so far today. The stock is trading 39% below the 52-week high of $54.20 and is 26% above the 52-week low of $26.18.

Is this an opportunity to buy call options on RAX because sellers are overreacting to today’s news? Or should you buy put options on RAX because the company missed a golden opportunity? 

The bulls make a convincing argument…

Investors are disappointed with RAX’s decision to not be acquired. However, in the long-run, this could be a very good thing for the company. It may ultimately provide more flexibility in the company’s strategic planning.

What’s more, management may engage in a share buyback in order to counter potential lost value from the non-acquisition. The company does have plenty of cash at the moment.

In addition, RAX has a fairly optimistic revenue forecast for the year. So, there’s no reason to believe the company can’t thrive on its own.

But the bears have a compelling case as well… 

One of the reasons RAX was looking to be acquired is because of the intense competition in the space. Competitors include giants like Amazon (AMZN), Microsoft (MSFT), and Google (GOOGL).

Those big players are extremely difficult to compete with from a pricing standpoint. In fact, RAX’s margins have been steadily eroding over time as the company attempts to keep its prices competitive.

An acquisition by someone like IBM (IBM) would have given RAX the resources to compete on a level playing field. That opportunity may now be gone for good as the company attempts to go its own way.

So is it time to be bullish on RAX due to the attractive entry point, or should you take a bearish position because competition in the industry is still fierce?

If you think the bulls are right, take a look at buying the RAX December 35 calls for around $2.00.

If you think the bears are right, take a look at buying the RAX December 31 puts for around $1.75. 

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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