Rent-A-Center Bulls Quadruple Their Money

Option traders posted substantial gains in Rent-A-Center Inc. (RCII) Monday, June 18 after reports that the company agreed to sell out to Vintage Capital for $15 a share.

On May 22, Investitute's proprietary programs showed that investors bought 3,500 $11 calls expiring on Sept. 21 for 85 cents with shares at $10.09. That was clearly a new position, as volume was above the strike's open interest of 3,328 contracts.

The investors likely bet that the beaten-down home furnishings rental company's earnings and share price would rebound. RCII delivered a weaker-than-expected first-quarter report on April 30 but raised free cash-flow guidance to $170 million from $130 million, a bullish indicator.

New September $11 calls sold for as much as $3.90 Monday afternoon, more than four times their initial purchase price. The stock rose 46% in the same time frame, a huge move but one that was still far below that of its options on a relative basis.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

Rent-A-Center traded at $14.22 midday Wednesday after training as high as $14.68 immediately following the deal news on Monday. The stock trended higher since it reported its second-quarter earnings on June 11, but Vintage Capital's acquisition of RCII tipped the scales decisively in the bulls' favor.

Contributed by Investitute. TheStreet has an affiliate partnership with Investitute. 

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