By Jud Pyle, CFA, chief investment strategist for the Options News Network
could experience significant upside throughout the next 16 days, until June options expiration, according to at least one investor who chose to load up on calls to express a bullish bet.
APOL gained 27 cents, less than 1%, to $51.67 during afternoon trading, and is slightly underperforming the broad-market gains on the day. The company has not announced any news recently, but the market anticipates its earnings report around June 28 (Thomson Reuters analysts estimate earnings of $1.55 a share). The front-month June 60 calls were active during the morning session, and the majority of the action looks like buyers calling for short-term upside.
By 1:22 p.m. EST, more than 11,800 out-of-the-money June 60 calls had changed hands versus current open interest of 5,200 contracts, indicating the majority of this volume was most likely initiated to open. The largest block of these calls crossed the tape around 9:52 a.m. EST for 46 cents per contract, which was the bid price when the volume changed hands.
Despite the pricing action, it looks like investors bought the calls on a bet that APOL shares will be trading higher than $60.46 at June options expiration. Take a look at implied volatility of these calls, which is roughly 61% compared to the stock's 30-day historical volatility of 46% (buying action most likely pushed up implied volatility levels today).
A long call trade is similar to a long stock position, but has a different risk profile. Like a long stock position, the call buyers who bought the June 60 calls could theoretically make unlimited profits to the upside. If the stock remains below the breakeven price, the long call trade caps maximum loss at the premium paid, or 46 cents per contract, as the stock moves closer to zero.
If the price of the calls appreciates throughout the next couple of weeks, with or without a rally in APOL shares, keep in mind that the investors who bought the June 60-strike calls could choose to sell back the options and take profits instead of holding them until expiration.
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."