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Options: Bullish Activity in Smith Int'l

Jud Pyle CFA

There was some bullish option activity in Smith International(SII Quote) today that was a continuation of some of the bullish activity that we have seen for a couple of weeks now not only in the oil service sector, but other commodity-related stocks.

This morning, an investor bought 2,000 of the July $27.50 calls for around $5.35. Simultaneously, he sold 4,000 of the January 2010, $17.50 puts for around $2.75 each. So in total, the investor collected a small credit to do this trade. The trade is definitely bullish because if the stock rallies, the calls will go up, and the puts will go down.

What I think is noteworthy about this trade is that it is another example of bullish activity in a stock that had gotten absolutely crushed in the fourth quarter of 2008. Like a lot of other stocks that were tied to the commodity bubble, Smith was down nearly 75% from its peak this summer to a trough in late November. Last week in this column we talked about bullish call buying in Transocean(RIG Quote), whose shares had met a similar fate. Both SII and RIG are now up more than 30% from their lows.

Some people might question if it is sensible to be bullish on a stock that has rallied over 30% in such a short period of time. But I think it demonstrates just how oversold the stocks in the commodity space had gotten. The sector was a darling of the hedge fund investors. Forced liquidations by hedge funds caused these stocks to go way down. As investors look to take more risk in 2009 they are flocking to these volatile spaces.

Bullish option activity like this does not mean that investors should charge out and buy shares of SII. But it is worth noting that some people are still bullish on the stock, even after the 30% run. Those people recognize that despite the 30% rally, the stock is still down over 60% from its highs.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.