New Highs for Lowe's?

By David Russell, reporter at OptionMonster

NEW YORK -- Lowe's (LOW) shares have never reached $40, but one long-term trader is betting that they will climb to that level by early next year.

OptionMonster's tracking systems detected the purchase of 5,000 January 2014 40 calls for $1.66 on Friday. The volume was almost five times the open interest at that strike before trading began so this is clearly fresh buying.

Those calls lock in the price where investors can buy shares in the home-improvement chain. The options can generate significant leverage in a rally because of their relatively low cost, but their value will melt away over time if the stock fails to perform.

Lowe's shares rose 0.79% to $35.83 on Friday and are up 34% in the last six months amid improving sentiment in the housing market. The stock is now pausing around the same level where it peaked in 2007, which could be causing some uncertainty among investors about the direction of its next move.

Buying calls allows investors to bet on a breakout with defined risk. In Friday's case, the trader can still benefit from gains in the stock but will lose only the $1.66 outlay if the old resistance level holds -- and regardless of how far the shares may fall. From a risk/reward perspective, that's a big advantage over buying shares at full price.

Total option volume in the company was almost twice the daily average in the name on Friday, with calls outnumbering puts by a bullish 7-to-1 ratio.

Russell has no positions in LOW

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.