If the predictive power of the options market holds true, something may be cooking at

Applied Materials

(AMAT) - Get Report


Along with other companies in its sector, the chip-equipment manufacturer has rallied recently. It ended Wednesday's session up 6 3/4, or 6.9%, to 104 3/4.

With the stock was trading down 1 to 103 3/4 at midday Thursday, however, one big institutional investor came to three different options exchanges to buy calls,

in size

, as traders say.

By around 11 a.m. EST, almost 10,000 Applied Materials April 105 call options traded, apparently to get long the company's stock. That's


, alright, and the buying also serves as a good, old-fashioned sign that it's likely done by a sophisticated investor that thinks the stock could be headed up further.

Since buying call options gives the investor the right to buy the shares at 105 by the third Friday in April, the institution is playing for a near-term pop in the shares.

"I'd say this was extremely aggressive buying," said Mike Riley, the specialist for Applied Materials options on the

American Stock Exchange

. Riley's pit saw about 3,700 contracts trade, while more than 4,500 traded on the

Pacific Exchange

and another 1,400 on the

Chicago Board Options Exchange

. "There's plenty of stock available, so we're just a little concerned."

Riley said the size and willingness to pay increasingly higher prices for the options worry market markers because, with no earnings reports expected or other news floating around on the company, they fear getting blindsided by a big announcement.

By selling options, market makers put themselves in a short position and have to hedge that appropriately with underlying stock. If a stock runs up quickly, they're often left unable to get an appropriate hedge.

"The buying drove implied volatility up from the high 60s to the high 80s today," Riley said. Implied volatility is the annualized measure of how much traders expect a stock to move. It increases when traders expect a stock to move dramatically, and takes options prices with it. Heavy demand for options will frequently have the same effect.

It certainly did in Applied Materials early in today's session. Even though the stock was down, the April 105 call prices were rising. The price jumped 1 1/8 ($112.50) to 9 1/8 ($912.50) on the CBOE and 2 ($200) to 10 ($1,000) on the Amex.

Those kinds of high prices add to the cost of the investment: For the institution to break even on exercising these options, the stock would have to be at around 115, a level that would include the strike price (105) plus the premium (10).

There is an outside chance that the call buying could be a hedge put on by someone shorting the underlying shares but traders thought that unlikely because of the sheer size of the buying.