Dow Chemical Sees Call-Spread Action

Options action in the chemicals name suggests investors are rolling calls out and up
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By Jud Pyle, CFA, chief investment strategist for the Options News Network

Ahead of the opening bell on Wednesday,

Dow Chemical Company

(DOW) - Get Report

announced earnings of 43 cents a share, which beat analysts' estimates by 13 cents. That news was enough to send the stock higher by more than 6% on the day. It also was enough to make some investors roll a front-month position out and up on a bullish bet that the stock could continue to climb.

By 3 p.m. EST, more than 15,000 front-month May 33 calls had changed hands vs. current open interest of 19,000 contracts. Also, more than 10,000 June 34 calls had traded vs. current open interest of 2,600 contracts. A look at time and sales of each individual option shows that much of the volume in both options traded as a spread. The volume was not in large chunks, which suggests that someone was working the order throughout the day, buying the spread little by little all day long.

The time and sales shows that during the session, every time the June 34 calls traded, the May 33 calls traded at the same time and at the same volume. In the morning, the spread was trading for close to 15 cents. But by the afternoon, the spread price had risen to close to 19 cents. This was occurring despite the fact that in the afternoon, the May 33 calls' delta was higher than the June 34 calls' by a small amount. This symbolized that traders were more and more willing to sell out of the May premium.

This call-spread action is not super bullish, but it is worth noting that if you were looking at all of the activity today, all of this call volume was not all buyers or all sellers, but traded as a spread. It is also worth considering that even after the jump in the shares today, the investor is willing to pay another 15 cents on a bet that the shares might keep moving to new 52-week highs. Given that the shares traded above $40 back in 2007, it is at least a possibility.

DOW shares closed up $1.76 to $31.83 on Wednesday.

Jud Pyle is the chief investment strategist for Options News Network 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."