Risk Reversal in FIO

Utah-based flash memory manufacturer Fusion-io (NYSE: FIO, $11.32, up $0.10 yesterday) popped 20% in a single day this past September, following Western Digital’s (WDC) acquisition of Virident and investor speculation that FIO could be next.  Shares traded to nearly $16, but pulled back below $10 in November and are now trading at a more modest $11.32 per share.

 Yesterday we saw a trader come in and sell 9,400 Sep 9 Puts for $0.70 while simultaneously buying 9,400 Sep 15 calls for $0.80.  Known as a risk reversal, this trader has established this position for a net debit of $0.10.   This is particularly bullish, as by selling puts to offset the cost of the calls this trader has assumed theoretical risk of over $8.4 million (in the unlikely event the stock becomes worthless).  

 FIO trades an average of 3.3 million shares per day, so this order has the potential to control about a quarter of the daily float.  Shares have traded in a 52-week range of $8.40-$20.20.  For this trader to break-even at expiration, the stock must trade to  $15.10.  Currently trading at $11.32,  there are 178 days between now and September expiration.