By Jud Pyle, CFA, chief investment strategist for the Options News Network
With very little time to go until options expiration -- four full trading days, in fact -- a group of investors is stocking up on front-month, out-of-the-money calls in
American Electric Power
The December 36 call is being traded heavily today, as nearly 14,500 contracts have crossed the tape. This compares to existing open interest of just 240, and suggests these options were likely traded to open. In the past six weeks, average daily option volume on AEP has been around 3,500 contracts across all strikes, so this degree of volume is definitely worth noticing.
What's also notable is that this does not appear to be the work of a single investor. The largest block all day has been 2,318 contracts. Instead, many small and midsized blocks have been hitting the tape throughout the trading day.
The majority of today's volume transpired during the first three hours of trading, which coincided with the stock's rally to a new 52-week high around 11 a.m. EST. The stock's quick jump to new highs was spurred by news that
received U.S. antitrust approval for a joint venture with AEP. At this point, the shares were trading at $36.52, making the 36-strike calls in-the-money.
Since then, the stock has settled lower and is now in the red, down about a half-percent on the day at $35.40. The option, along with the stock, has been volatile today, trading between 65 cents and 15 cents. Currently, the 36-strike calls are bid at 15 cents and asked at 25 cents.
Assuming investors bought these calls to open, they will need AEP to rally above the 36 strike by Friday's closing bell. Today's activity doesn't mean you should jump on the bullish AEP bandwagon. But it is interesting that the stock is seeing so much unusual call volume a few days before December options expire.
Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) 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.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."