Trading Options on, Inc. (CRM)

04/13/2010 12:01 am EST


Jud Pyle

Chief Investment Strategist, Inc. (NYSE: CRM) shares are up on the day following positive notes from Deutsche Bank on Friday, and options action during afternoon trading suggests that at least one investor anticipates the good news to buoy the stock to new highs throughout the later term.

CRM is currently trading at $80.62, up more than 1%, or roughly 85 cents, on the day. The stock is just cents away from its 52-week high of $81.23. The directory software company has not announced its earnings release date, but the market anticipates the report around May 20, and analysts estimate earnings of 30 cents a share. An investor traded an out-of-the-money (OTM) ratio call spread calling for further upside throughout the next few months.

At 2:16 pm ET, an investor bought the August 85-100 call one-by-two spread for a net debit of $2.90 per spread. The investor bought 13,000 August 85 calls for $5 per contract and simultaneously sold twice the number of August 100-strike calls for $1.05 per contract.

Investors who bought this spread will make a maximum profit if the stock trades right at $100. If the stock stays below $87.90 or climbs higher than $112.10, investors will begin to lose money. If the stock is below $85, this spread caps any losses at $3,770,000, but if the stock soars higher than the upper breakeven point, the investor could theoretically incur unlimited losses.

For a visual of the risk/reward dynamics of this trade, consult the graph below.

Click to Enlarge

The lower-strike 85 calls have an implied volatility of 35%, and the higher-strike 100 calls have an implied volatility of 31%, compared to the stock’s 30-day historical volatility of 22%. The options action we saw today suggests one investor expects the stock to rise no more than 25% higher than its current level.

By Jud Pyle of

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