Bullish Option Action for a Penny Stock

03/19/2010 12:01 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Call volume has jumped to more than twice the norm on YRC Worldwide Inc. (YRCW), with about 13,000 of these bullishly oriented options changing hands so far. By contrast, YRCW's expected call volume was fewer than 5,300 contracts.

YRCW price chartMost of today's call players are taking a long-term approach, with 12,365 contracts crossing the tape on the stock's January 2011 1-strike call. The majority of these calls have traded at the ask price, suggesting they were purchased, and implied volatility on this LEAPS option has jumped 7.1% at last check. Currently, the stock's January 1 call is home to heavy open interest of 51,962 contracts.

This uptick in call buying is no one-day wonder, though. YRCW boasts a ten-day International Securities Exchange (ISE) call/put volume ratio of 48.88, which ranks higher than 99% of other such readings taken during the previous year. In other words, speculative investors have snapped up calls over puts at a faster pace just 1% of the time.

The bullishly skewed trend in the options pits is out of whack with YRCW's price action, with the stock continuing to struggle under pressure from its ten-week moving average. The stock has given up nearly 49% year-to-date, compared to modest gains for the broader equities market.

However, the security isn't necessarily vulnerable to a massive reversal of optimistic sentiment. With 20.6% of the penny stock's float sold short, there are plenty of traders betting on YRCW to backpedal further. In fact, these short sellers could be responsible for some of the stock's heavy call activity, as they look to hedge their bearish bets.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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