As far as relevance to artificial intelligence is concerned, Arista Networks (ANET) might not be the most celebrated name when stacked against enterprises like Microsoft (MSFT), Meta Platforms (META) or Oracle (ORCL) — all of which are Arista clients. Nevertheless, as a prominent provider of cloud networking solutions, the tech giant plays a critical role in machine intelligence due to its specialization in high-speed networking infrastructure.
Fundamentally, AI training and inference require massive data transfers between graphics and central processing units and storage systems. Arista’s high-speed Ethernet switches help hyperscalers — including Meta and Microsoft — manage these data flows efficiently. Further, large organizations have inked contracts with Arista because their AI workloads rely on the underlying low-latency, high-throughput networking gear.
Unsurprisingly, Arista recently posted solid fourth-quarter earnings results while raising its full-year guidance. Specifically, revenue last quarter jumped 25% to $1.93 billion while adjusted earnings per share also climbed by 25% to 63 cents. Both figures beat their respective analysts’ consensus targets of $1.9 billion and 57 cents.
So, why the volatility in ANET stock? Beyond broader economic and geopolitical concerns that have shaken the market, many investors apparently grew concerned about a potential slowdown with a key client. Here’s what Barchart content partner Motley Fool had to say on the matter:
Investors appeared mostly concerned with Meta, as 2024 revenue from the company fell about 17%. This could be backed out as 21% of Arista's $5.9 billion in revenue from 2023 came from Meta ($1.2 billion), while 14.6% of its $7 billion in 2024 revenue ($1 billion) came from the company. However, this decline came after the end of a pretty large 400G (gigabit) switching upgrade at Meta that ended in 2023. The 400G refers to ethernet speed.
Still, as the publication noted, “Arista tends to be conservative with guidance, so it's not a surprise that the company didn't raise its forecast by more, which it seems investors wanted.” Therefore, even with the ugliness, speculators could prep for a possible comeback.
Taking the Contrarian Approach with ANET Stock
To be sure, the long-side approach — which runs counter to the present trend — is quite risky. On Monday, ANET stock represented one of the highlights in Barchart’s list of unusual options volume, though not necessarily for the most encouraging reasons.
When the dust finally settled on the session, total options volume reached 78,846 contracts against an open interest reading of 382,881 contracts. This stat was 31.65% above the trailing one-month average volume. Breaking down the metric, call volume stood at 45,113 contracts while put volume landed at 33,733.
On paper, the sub-1 put/call volume ratio would seem optimistic. However, a cursory look at options flow — which focuses exclusively on big block transactions likely placed by institutional investors — revealed a different outlook. Net trade sentiment on Monday slipped to almost $1.95 million below parity, thus favoring the bears. Therefore, a large swath of the calls were sold, which feature neutral to bearish implications.
While the dark clouds do appear ominous, it’s important to note that as a baseline, ANET stock commands an upward bias. Using data from January 2019, a position entered at the beginning of the week has a 56.39% chance of rising by the end of it. Over an eight-week period, this probability rises to 62%. Based on this framework, speculators may be intrigued by Arista’s volatility.
However, what makes the present circumstance special is that extreme volatility is rare. Over the past five sessions, ANET stock has lost around 15%. Since January 2019, there have only been 10 instances when the security lost between 10% and 20% over a one-week period (between Monday and Friday).
While it’s a small dataset, the upside behavior remains largely the same, with dynamic long odds reaching 60% for most weeks. However, the difference is that the bullish sentiment appears to be pushed forward relative to the baseline. This market intelligence can potentially be exploited for a profit-scalping idea.
Positioning a Transaction Ahead of a Possible Upside Wave
Following an extreme-fear event, the first subsequent week sees dynamic long odds pop to 70% instead of 60%. Now, market forecasting is hardly what you call an exact science. However, it’s quite possible that a bounce back may materialize within the next two weeks. If so, speculators can position themselves ahead of time with a bull call spread.
Assuming the positive scenario, ANET stock could see a median return of 7.5% to almost 14%. This would see a projected range between $99.70 and $105.34. Because market makers aren’t expecting a big move, call options appear favorably underpriced. Therefore, aggressive traders can elect the 94/97 bull spread for the options chain expiring March 7. This transaction risks $130 for the chance to earn $170.
In my opinion, the really enticing trade is the 98/100 bull spread for the same expiration date. This entails risking $55 for the chance to earn $145, a payout of almost 264%. Given historical trends, this trade has a legitimate shot of being in the money despite the ultra-low odds that market makers have assigned.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
