Options Signal Higher Highs in 2 Stocks

09/18/2012 8:00 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Elizabeth Harrow and Andrea Kramer of Schaeffer’s Research highlight option activity in two companies that points to bullish sentiment on the stocks.

Back-month call players flocked to Sprint Nextel (S) last week, with traders placing their bets in the October series of options.

Overall call volume on the telecom stock rose to 1.04 times the norm, as approximately 48,000 contracts changed hands on Friday alone—easily outnumbering the roughly 12,000 puts that were traded on S during the course of the session. The most active strike was the equity's October 6 call, where 11,835 contracts crossed the tape.

Upon closer inspection, about 79% of these October 6 calls traded closer to the ask price, indicating they were purchased. Implied volatility on the option increased 2.3 percentage points by the close, and open interest at this strike jumped over the weekend by 7,912 contracts. In other words, it seems safe to assume that new bullish bets were opened on Friday.

Based on the option's volume-weighted average price (VWAP) of $0.12, those October 6 call buyers need S to rise above $6.12 over the next five weeks until back-month expiration. The shares finished last week at $5.26, so these bulls are looking for a gain of 16.3% just to reach breakeven.

On the charts, S has already strung together an impressive gain of nearly 125% in 2012. The shares have lately been ushered higher by support at their ten-day and 20-day moving averages, while resistance has been emerging in the $5.50 area.

chart
Click to Enlarge

Next: The shares of LinkedIn

|pagebreak|

The shares of LinkedIn (LNKD) have been assailing new heights, and it looks like the options crowd is expecting even more upside in the short term. Last Friday alone, the social-networking concern has seen roughly 19,000 calls change hands—almost four times its average intraday call volume, and close to three times the number of LNKD puts exchanged.

Garnering the most attention has been the weekly 125 strike call, which has seen around 6,100 contracts traded on open interest of fewer than 1,900, pointing to a batch of eleventh-hour bets. What's more, nearly three-fourths of the soon-to-expire calls traded at the ask price, suggesting they were bought.

By purchasing the calls to open, the buyers are expecting LNKD to muscle even higher over the next few hours, which represents the calls' remaining lifespan. Specifically, the volume-weighted average price (VWAP) of the calls is $0.41, meaning the buyers will be profitable if LNKD ends atop the $125.41 level (strike plus premium paid). However, the shares have already toppled this breakeven rail in intraday action,

Meanwhile, other options players have even higher hopes for LNKD. So far, the stock's out-of-the-money September 130 call has seen close to 2,100 contracts traded on open interest of just 735. Plus, most of the calls have crossed at the ask price—again, hinting at buyer-fueled volume. By purchasing the calls at a volume-weighted average price (vwap) of $0.67, the investors are hoping LNKD extends its uptrend beyond the $130.67 level this week.

chart
Click to Enlarge

Elizabeth Harrow and Andrea Kramer can be found at Schaeffer’s Research.

Related Articles on OPTIONS