Call trading surged in
Time Warner Cable Inc's
) options pits yesterday, as 8,774 of the bullishly skewed
contracts changed hands -- more than four times the average daily
volume, and 16 times the number of puts. The majority of the
speculators targeted back-month options, and in particular, the
October 120 call, where nearly 5,600 contracts traded, including a
block of over 2,200.
Since open interest increased overnight, it's safe to say new
positions were initiated. More specific yet, with 95% of the TWC
calls going off at the ask price, we can assume a large percentage
of the volume was of the buy-to-open variety -- an assumption
confirmed by data at the International Securities Exchange (ISE).
The volume-weighted average price (VWAP) for the TWC calls was
$1.30. Therefore, for yesterday's bulls to profit, they need the
underlying shares to advance from their current position at
$107.99, to $121.30 (strike price plus VWAP), by back-month options
expiration. In other words, the stock needs to gain upwards of 12%
over the next seven weeks for the investors to profit from their
transactions. If Time Warner Cable Inc falls short of the strike
price, however, the maximum potential loss is the premium paid.
TWC was last seen trading above $120 in early August, before being
pressured lower by its 10-day moving average, amid discontentment
). According to the option's delta of 0.21, or 21%, the position
has roughly a 1-in-5 chance of moving in the money by the closing
bell on Oct. 18.
This article by Alex Eppstein was originally published on
Schaeffer's Investment Research
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