Options: Call Buyer in Viacom

By Jud Pyle, CFA, chief investment strategist for the Options News Network

The class B shares of Viacom(VIAB) are currently up over 8% today to $15.82. The shares are rallying after Barclays upgraded the company to overweight with a price target of $20. The company is set to report earnings in a little over a week, before the market opens on Feb. 12. This bullish sentiment from Barclays was met with some bullish call buying.

In the first 50 minutes of trade this morning, 20,000 of the Sept. 20 calls were purchased versus an open interest of just 17 according to the Sidewinder report at www.onn.tv. The calls were bought for $1.40 when the stock was around the $14.85 level.

At first glance, this trade appears very bullish, and it probably is. However, a closer look shows that these options traded with stock, meaning that the call buyer simultaneously sold shares to the option market makers. A look at the time and sales in Viacom shows that 700,000 shares traded at $14.8572 around the time of the option trade. That is the number of shares that would need to be bought by the market makers to make this trade delta neutral.

So the fact that the investor did a delta neutral trade could mean that they are more interested in betting on volatility than direction. The price of $1.40 in the calls with stock at $14.85 is an implied volatility of 61. The historical volatility for the last 3 months is 83. So if this investor thinks that Viacom will remain that volatile, then purchasing options on an implied volatility of 61 will make money for the investor if they are hedged daily until expiration.