Options: Careful Trade in Charles Schwab

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

Financial services provider Charles Schwab ( SCHW) is scheduled to announce second-quarter earnings the week of July 13.

No firm date has been set but it's likely that the report will hit the Street on July 16 or 17, putting the announcement prior to the July expiration. Today, at least one investor boosted call volume by buying July calls and selling August calls.

Amid a slow options trading day today, we noticed an investor bought approximately 10,000 July 18 calls and simultaneously sold 10,000 Aug. 18 calls with the stock at $17.03.

The July 18 calls are currently trading up three cents and are home to current open interest of nearly 17,000 contracts. The Aug. 18 calls have gained five cents on the day so far, and are home to current open interest of 1,871 contracts. The volume weighted average price of the July 18 call is $0.209 per contract and August 18 call contracts are trading at $0.446.

So the investor collected roughly 25 cents to buy July and sell August. This computes to an implied volatility of 38.1 for the August calls, compared to a 63-day realized volatility of 55.

In light of the fact that open interest in the July 18 calls is close to the today's volume, it is likely that this is the same investor that sold 10,000 July 18 calls for around $1.25 with the stock at $18 back on May 19. We will know for certain when we see the open interest data for the July 18 calls. If the investor sold to close in July, we could see open interest fall by close to 10,000 contracts.

The stock has rallied 50% since reaching a 52-week low of $11.34 on March 5. It is currently up approximately 17 cents to $17 a share.

With this type of call volume, it is most important to not be fooled into thinking that all of this volume might indicate a bullish or bearish play on the shares. Remember, the investor bought as many options as they sold.

But for the long term, it probably indicates that at least one investor thinks the shares will be hard-pressed to rally much higher than $18. However, for bullish investors in the stock, there is plenty of supply around in the Aug. 18 calls for people who want to bet on a rally.

Meet Jud Pyle live in Las Vegas at the Forex & Options Expo. Click here to find out more.

Jud Pyle is the chief investment strategist for Options News Network 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."

More from Options

Let the Najarian Brothers Crash-Proof Your Portfolio

Let the Najarian Brothers Crash-Proof Your Portfolio

Let the Najarian Brothers Help You Generate Income With Options

Let the Najarian Brothers Help You Generate Income With Options

All Investors Can Trade Options, Just Ask the Najarian Brothers WATCH VIDEO

All Investors Can Trade Options, Just Ask the Najarian Brothers WATCH VIDEO

Learn Options Trading from the Najarian Brothers, the Best in the Business

Learn Options Trading from the Najarian Brothers, the Best in the Business

Call Options Score Big in Russell 2000

Call Options Score Big in Russell 2000