By Jud Pyle, CFA, chief investment strategist for the Options News Network
Significant call activity in
the day before its first-quarter earnings report suggests at least one investor could be betting that shares of the computer maker will move less than 10% on the earnings announcement.
Looking at the DELL July 10 calls, these contracts changed hands more than 4,000 times at $1.62 during the first two hours of trading today. By the end of the day, 6,780 of these calls traded for an average price of $1.52. The July 11 calls traded more than 11,900 times today at an average price of 85 cents.
The July 10 calls, home to 845 contracts in open interest, dropped 16 cents on the day to $1.39 from $1.55. The July 11 calls, home to 7,700 contracts in open interest, dropped 17 cents to 75 cents from 92 cents on the day. DELL stock closed down 3 cents to $11.11. The fact that the price of these calls dropped more than the stock is evidence of the fact that sellers were more active than buyers today.
The June 11 straddle is another measure of just how much the market thinks Dell will move on earnings. The straddle (the sum of the call and the put) closed Wednesday at $1.05, down from $1.13 Tuesday night. The fact that the straddle is lower today indicates that market sentiment believes that the stock will not move more than $1.05 from the strike price.
Normal daily options volume for DELL is around 33,248 contracts, but about 41,000 contracts have traded today. The majority of that volume has accumulated in the June expiration month, the July 10 call activity notwithstanding.
DELL is scheduled to announce earnings tomorrow after the market closes. Analysts expect a drop in earnings per share to 23 cents a share from 34 cents a share in the same period last year. In the fourth quarter, DELL announced earnings per share of 26 cents. A 7% decline in personal computer shipments and layoff rumors could account for the expected drop in earnings and analyst downgrades on the company. In addition, rival
took over Dell's previous post as the world's leading PC maker last quarter.
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."