By Jud Pyle, CFA, chief investment strategist for the Options News Network
Lowe's Companies Inc.
earnings figures are due on Monday, May 17, before the market opens, and options action during today's session suggests an investor traded a hefty number of near-term calls.
Lowe's shares closed down 17 cents to $26.08 despite a positive note from FBR Capital saying it expects Lowe's shares to experience upside around the company's earnings release. Analysts estimate Lowe's to announce earnings of 30 cents per share.
By the close on Friday, more than 10,100 June 28 calls changed hands for an average price of 39 cents per contract. These calls were home to current open interest of 10,700 contracts, indicating the investor could have bought to close these options. We could verify the fact that the investor bought the options because at one point on the day, the options were higher despite the stock trading lower. The buying action pushed implied volatility up slightly to 34% compared to the stock's 30-day historical volatility of 33%.
If the investor closed out a short position, the action could have resulted in a small profit or loss. If the investor bought to open this lot, the long call trade will make money if Lowe's shares climb higher than the breakeven price of $28.39 (this represents a 9% rally from the stock's current level). In this case, the maximum gain on the trade is theoretically unlimited as the stock continues to rally. If Lowe's shares remain lower than the breakeven, the investor could incur a maximum loss of the premium paid, or $39 cents, per contract.
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."