Options Guide

Return to Article

Options: Careful Trade in Charles Schwab

Jud Pyle CFA

Financial services provider Charles Schwab(SCHW Quote) is scheduled to announce second-quarter earnings the week of July 13.

No firm date has been set but it's likely that the report will hit the Street on July 16 or 17, putting the announcement prior to the July expiration. Today, at least one investor boosted call volume by buying July calls and selling August calls.

Amid a slow options trading day today, we noticed an investor bought approximately 10,000 July 18 calls and simultaneously sold 10,000 Aug. 18 calls with the stock at $17.03.

The July 18 calls are currently trading up three cents and are home to current open interest of nearly 17,000 contracts. The Aug. 18 calls have gained five cents on the day so far, and are home to current open interest of 1,871 contracts. The volume weighted average price of the July 18 call is $0.209 per contract and August 18 call contracts are trading at $0.446.

So the investor collected roughly 25 cents to buy July and sell August. This computes to an implied volatility of 38.1 for the August calls, compared to a 63-day realized volatility of 55.

In light of the fact that open interest in the July 18 calls is close to the today's volume, it is likely that this is the same investor that sold 10,000 July 18 calls for around $1.25 with the stock at $18 back on May 19. We will know for certain when we see the open interest data for the July 18 calls. If the investor sold to close in July, we could see open interest fall by close to 10,000 contracts.

The stock has rallied 50% since reaching a 52-week low of $11.34 on March 5. It is currently up approximately 17 cents to $17 a share.

With this type of call volume, it is most important to not be fooled into thinking that all of this volume might indicate a bullish or bearish play on the shares. Remember, the investor bought as many options as they sold.

But for the long term, it probably indicates that at least one investor thinks the shares will be hard-pressed to rally much higher than $18. However, for bullish investors in the stock, there is plenty of supply around in the Aug. 18 calls for people who want to bet on a rally.

Meet Jud Pyle live in Las Vegas at the Forex & Options Expo. Click here to find out more.

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.