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Unusual Call Activity in Cephalon: Options

At least one investor is bullish in the drug manufacturer and has boosted call volume ahead of the company's earnings.
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) -- Although



did not announce significant news Thursday, at least one investor is taking a bullish stance on the drug manufacturer and boosting call volume days ahead of the company's earnings.

The out-of-the-money December 60 calls have changed hands more than 17,000 times so far today and are home to current open interest of just 465 contracts, indicating investors traded their lots to open.

These calls are up 65 cents so far on the day to $1.53. This computes to an implied volatility of 40 with the stock around up $1.48 on the day to $54.75. Around 10 a.m. EST, a block of 12,400 of these options traded for $1.17 (most likely bought to open).

Those bullish investors who bought the December 60 calls need CEPH shares to expire higher than $61.17 to make money, unless of course the calls rise prior to expiration following a rise in the shares and the investor chooses to sell them to take profits.

The December 60 calls have a delta of approximately 25, meaning for every dollar move in the underlying, these options should climb 25 cents. Given the move in CEPH shares so far today, these calls should have moved up roughly 38 cents, but the call-buying activity has pushed up the price of the options by 90 cents, or 52 cents higher than the delta would suggest.

Normal daily option volume in CEPH is approximately 3,500 contracts, so this type of volume for CEPH is unusual and has caused implied volatility to rise in that option. Rather than the options being spread out among multiple buyers, this is one investor betting that CEPH will continue to move.

-- Written by Jud Pyle in Chicago

At the time of publication, Pyle did not have any positions in the stock mentioned. 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."