Options: Heavy Call-Buying in Red Hat

What is noteworthy about this volume is that most of the activity is on the buy side, meaning there are more buyers of these calls than sellers.
Publish date:

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Shares of

Red Hat

(RHT) - Get Report

were up more than 9% today to $16.3, with about an hour left in the trading day. The company is set to announce earnings after the close Wednesday, and at least one investor is expressing a bullish view, buying calls looking for a potential bump in the stock.

Looking at the April 17.5 calls, we find that more than 9,000 had traded in the first 35 minutes of trading this morning. Open interest in these calls is 861 according to the


report at


. As the day has worn on, the volume in the calls is now up to more than 18,000.

Image placeholder title

The April 20 calls are also seeing heavy activity, trading more than 8000 times vs. open interest of 283. What is most noteworthy about this volume is that most of the activity is on the buy side, meaning there are more buyers of these calls than sellers.

As we mentioned, this buying activity could be a bet by an investor that shares of RHT will continue to run if the earnings announcement has positive data. Another thing that might be driving the call-buying is continued speculation that


(ORCL) - Get Report

might be interested in buying RHT.

The April 17.50 call options traded this morning for around 55 cents with the stock near $15.7. At that price, the buyer just needs the stock to be above $18.05 to be in the money at expiration. Since that time, the stock has continued to rally and the calls are currently trading around $1.05, with the stock near $16.30. If RHT holds these gains today, it would be the highest close for the shares since September.

Call-buying like this does not mean that investors should run out and buy shares. But it is worth noting that there are potentially two catalysts to make the stock jump: a potential takeover, or a positive earnings announcement.

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."