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

On Feb. 24, I wrote about some call-buying activity in Hewlett-Packard ( HPQ). At the time, the stock was trading for around $29. It since has slid to below $26 on March 9 before rallying to close on Friday at $28.85.

The March 30 calls that were purchased for about $1.15 therefore expired out of the money. However, yesterday with the big rally in the market, HPQ shot back up to over $31. Today there was some interesting, longer-dated call-option volume to look at.

Looking at the January 2010 32.5 calls, we find that 12,500 were on the tape in the first 90 minutes of trading this morning. Open interest in these calls is 7,398 according, to the Sidewinder report at www.ONN.tv.

The calls were bought by an investor for a price of around $4.30 vs. stock around $31.05. Then, as the day wore on, we find that more than 12,000 of the November 37.5 calls were purchased as well. The open interest in those options was just 15, but that is more because those options were newly listed yesterday.

The fact that this buying activity is taking place in November and January 2010 is noteworthy because options like these typically do not trade as liquidly as the options in the front two months of expiration, which are currently April and May.

Front-month options typically make up the lion's share of trading volume in all options. Further-out options have smaller theta but less leverage, meaning that they lost less value for every day that goes by, but they cost more than the same strike option in an earlier month. So they are long-term trades, rather than bets on a short-term catalyst.

Another thing that is noteworthy about this call-option activity is that it has pushed the prices of the calls up, despite the shares being lower. That is a very practical way to understand that implied volatility is higher. For example, with the stock down 7 cents to $31.10 at roughly 1:21 p.m. EST, the January 32.5 calls were up 20 cents, from $4.30 to $4.50. That is the result of implied volatility rising from 43 to 45.

Call-buying like this does not mean that investors should run out and buy shares. But it is worth noting that some option investors are making longer dated bets that the stock could rally.

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."

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