A Quick Bounce for Tower Group?

By Mike Yamamoto, managing editor of OptionMonster NEW YORK -- Tower Group ( TWGP) has plummeted 72% in just the last two months, but traders are betting that the insurance firm will bounce this week.

OptionMonster's market scanners detected heavy buying in the October 5 calls on Friday, with large blocks pricing for 15 cents and 20 cents. More than 4,300 of the options changed hands in volume well above the strike's previous open interest of 847 contracts, clearly indicating new activity.

These long calls, which lock in the price where the stock can be purchased, are looking for a quick rally because they expire at the end of Friday's session. The contracts could provide significant leverage in a rally but will expire worthless if shares remain below $5.

Tower's shares climbed 10.02% to close at $4.49. The stock gapped down on three occasions since closing at $21.61 on Aug. 7, and there have been reports that management has hired JPMorgan to find a potential buyer for the company. Guggenheim Securities upgraded the name to "buy" from "neutral" on Friday, though it lowered its price target to $8 from $11.

Total option volume in the name was twice its daily average for the last month. Overall calls outnumbered puts by 14 to 1, a reflection of the session's bullish sentiment.

Yamamoto has no positions in TWGP.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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