Call Buyers Swarm JDSU on Buy Rumors

06/08/2011 7:00 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Unusual option activity has unfolded this week for JDS Uniphase Corp. (JDSU), and with short interest rising while buyout rumors are swirling, the cause for this call crunch seems two-sided.

Call players this week are flocking to place their bets on JDS Uniphase Corporation (JDSU), with volume accelerating to five times the expected level within the first hour of the session. On Tuesday morning alone (June 7), roughly 22,000 calls had crossed the tape by 11:00 am ET, as compared to fewer than 1,500 puts.

The center of attention is JDSU's June 19 call, where 7,734 contracts have traded. Not far behind is the June 20 call, with volume of 5,238 contracts changing hands in Tuesday trading. The majority of these front-month calls have traded at the ask price, indicating that buyers are driving the bulk of the volume. Plus, today's volume is outstripping open interest of 2,771 contracts at the June 19 strike, revealing that new positions are being added here.

This skew toward calls continues a recent trend for JDSU. During the past ten sessions, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and Nasdaq OMX PHLX (PHLX) have bought to open 3.06 calls for every put on the equity. This ratio arrives in the 67th percentile of its annual range, suggesting that traders have purchased bullish bets over bearish at a faster-than-usual pace in recent weeks.

However, short interest on the stock has ballooned lately. The number of shares sold short surged by 39.5% during the most recent reporting period, and these pessimistic positions now account for 3.5% of JDSU's float. With short interest and buy-to-open call volume rising in tandem, it's possible that some of the option activity is linked to increased hedging by the shorts.

Checking out the charts, JDSU is in the process of rebounding from support at the $18 level. This former area of resistance has provided a floor for the shares since mid-April.

Click to Enlarge

JDSU has also been the subject of takeover rumors, which no doubt have led to increased interest from call buyers.

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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