Bullish Bet on Arista Networks via Long-Term Call Options

Understanding the Bullish Sentiment Behind Arista Networks (ANET) Call Options

A recent surge in unusual call options activity for Arista Networks (ANET) has caught the attention of investors. This significant movement in long-dated, out-of-the-money (OTM) call options suggests a strong bullish outlook among market participants. Following the release of its Q2 earnings report, ANET stock has seen a substantial increase, rising over 17% on the day of the announcement.

Currently, ANET is trading at $138.76, up from $118.12 the previous day and significantly higher than its recent low of $86.25 on June 20. The unusual call options activity can be observed in the daily reports provided by HAWXTECH, which highlight that nearly 15,000 call options contracts have been traded at the $150 strike price, expiring on October 17, 2025. This strike price is considered OTM since it's about 8.37% above the current stock price, indicating a high level of confidence in the stock’s future performance.

The volume of these call options is over 79 times the prior number of outstanding call options, suggesting that institutional investors have taken a considerable position. This could be due to several factors, including the company's strong financial performance and its position in the growing AI-driven technology sector.

Strong Earnings and Free Cash Flow Performance

Arista Networks provides data center and cloud networking software solutions that are benefiting from increased capital spending on AI technologies by major tech companies. In its latest quarterly results released on August 6, the company reported a 10% quarter-over-quarter revenue increase to $2.2 billion and a 30% year-over-year growth. Additionally, six-month revenue reached $4.21 billion, representing a 29% year-over-year increase.

These results exceeded analysts' expectations, with a 4.3% upward surprise. Analysts are likely to revise their forecasts upward, which could further boost the stock's performance. Arista Networks also demonstrated strong profitability, with a Q2 operating income of $1.08 billion, which constitutes 49% of its revenue. Its operating cash flow for the six months was 43.7% of the $4.21 billion in revenue.

Given its minimal capital expenditure ($52.4 million for the six months), the company generated a free cash flow (FCF) of $1.79 billion, representing 42.5% of the six-month sales. These figures suggest that FCF forecasts may also see an upward revision.

Projected Revenue and FCF Growth

Analysts are projecting significant revenue growth for Arista Networks, with estimates of $8.42 billion for 2025 and $9.95 billion for 2026, reflecting a 17.6% year-over-year increase. Yahoo! Finance anticipates even higher projections for 2026 at $10.31 billion. After today's revenue surprise, it's reasonable to expect that these forecasts will be revised upward.

Using these projections, the next 12 months (NTM) revenue is expected to average around $9.56 billion. Applying a 43.7% operating cash flow (OCF) margin and assuming a 10% increase in capital expenditures, the FCF forecast would be approximately $4.063 billion. This represents a 13.5% increase compared to the projected $3.58 billion run rate FCF for 2025.

Applying a 2.0% FCF yield metric (equivalent to a 50x FCF multiple), the potential market cap could rise to $203.15 billion, resulting in a 16.8% upside from the current $173.87 billion. This would set a price target of $162 per share, calculated as $138.76 multiplied by 1.168.

How the Call Options Play Works

The $150 strike price call options have a midprice premium of $6.25 per contract, setting the breakeven point at $156.25. This is below the projected price target of $162, making the call option potentially profitable. For example, if ANET reaches $160 in two months, the call option could trade for more than the intrinsic value of $10, possibly with an additional $2 or $3 in extrinsic value, leading to a premium of $12 or $13.

An investor who purchased the call at $6.25 could double their investment in just two months. This could explain the heavy volume in today's call options, as investors believe the target price will be reached within the next two months. However, this strategy carries significant risk, as the target price is based on NTM revenue and FCF projections, which may not materialize within the short term.

Investors should carefully consider the risks involved in following institutional investors in this call option play. Resources like HAWXTECH's Options Learning Center can help investors better understand the complexities and risks associated with options trading.