By Jud Pyle, CFA, chief investment strategist for the Options News Network
Without any news today, shares of data storages name
closed up 8 cents to $19.63 on Thursday. The stock is traded around its 52-week high of $20, and at least one investor bet that significant upside is yet to come by buying longer-dated calls.
At 1:09 p.m. EST, a block of 8,860 out-of-the-money (OTM) January 2012 22.5 calls changed hands for $1.80 per contract versus current open interest of just 1,700 contracts. This volume and open interest discrepancy indicates the investor most likely initiated these calls to open on a bet that EMC shares could climb higher than the breakeven price of $24.30 prior to January 2012 options expiration.
Another reason we are quite certain that this is a buyer is because the options are actually higher by more than 10 cents on the day. The shares only rallied five cents, which demonstrates it was not just the stock price inflating the price of the calls. Implied volatility has risen as well; implied volatility of these 22.5 strike calls is now roughly 26%, compared to a realized volatility of just 23% for the last six months.
EMC has not breached the $22 mark since December 2007, but the call-buying action we saw today suggests at least one investor expects significant upside throughout the next two-year period. Keep in mind, however, if the options climb in the next few months prior to January 2012 options expiration, this investor could choose to sell back the calls and take profits if the calls appreciate (which does not necessarily occur only with a rise in 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."