By Jud Pyle, CFA, chief investment strategist for the Options News Network
While the broader market, as measured by the
SPDR S&P 500 ETF
(SPY) struggles to hold on to its earlier gains, shares of
edged higher into the close. Heavy options volume has accumulated throughout the trading day thanks to at least one investor who appeared to express bullishness by buying longer-dated calls.
CVX climbed 12 cents on the day to close at $74.18.Analysts expect CVX to announce earnings figures around July 30. The December 80-strike calls were active during today's session thanks to investors who called for significant upside throughout the rest of the year.
By the end of the day, more than 7,600 of these out-of-the-money (OTM) calls had crossed for $3.30 per contract (closer to the bid price at the time of the trade) versus current open interest of 2,700 contracts. This options action suggests investors initiated the majority of this volume to open on a bullish bet that CVX shares will be trading higher than $83.30 at December options expiration (this represents an 11% rise from the stock's current level). If CVX shares are trading higher than this breakeven price, the buyers could theoretically make unlimited gains as the stock moves higher. On the other hand, if CVX shares remain lower than the breakeven price, this long call position caps maximum loss at the premium paid or $3.30 per contract.
Implied volatility of the December 80 calls is 26% compared to the stock's 30-day historical volatility of 32%. The buying action we saw today suggests the investor is looking for greater swings in volatility during the longer term that will result in significant upside. If volatility does spike and the price of the calls appreciate prior to December options expiration, the investors could choose to sell back the options and take profits with or without a big rally in the stock.
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."