Options Update: Calls Collect as Verizon Extends Its Recent Rally

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Verizon Communications Inc. ( VZ ) saw a surge in option activity on Monday, with roughly 98,000 contracts exchanged -- triple the communication concern's expected daily option volume. Traders showed a distinct taste for VZ calls, with 75,000 contracts crossing the tape on the session.

Monday's preference for calls is in line with the recent trend on the International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ). During the past two weeks, traders on these exchanges have bought to open 4.3 VZ calls for every put purchased, a ratio which ranks above 90% of all other readings taken during the past 12 months. This elevated ratio indicates that speculators on the ISE and CBOE have initiated bullish bets on VZ at a much faster pace than usual lately.

However, VZ's Schaeffer's put/call open interest ratio (SOIR) -- which measures put open interest relative to call open interest in the front three months -- checks in at 1.31, in the bearish 74th annual percentile. In other words, there is still plenty of room for optimism to continue to grow in the options arena. However, it's possible that these out-of-the-money puts have been open for some time as LEAPS -- which could be skewing VZ's SOIR toward the bearish end of the spectrum.


Option players looked ahead to the February series on Monday, with the February 36 call being a popular choice. This strike saw volume of 7,000 contracts change hands -- the majority of which crossed at the ask price, suggesting that these calls were likely purchased. Open interest increased by 2,633 contracts overnight, confirming that fresh positions were added at this back-month strike. By buying to open VZ's February 36 call, option players are counting on the stock to rally above the $36 level over the next six weeks.

In fact, on Monday VZ did rally above the $36 level, tagging a fresh high of $36.45. The equity has continued this trend today, hitting a brand-new annual peak of $36.66 out of the gate this morning. Technically speaking, VZ has been trending steadily higher since the beginning of December along the support of its 10-day moving average.

Daily Chart of VZ Since October 2010 With 10-Day Moving Average

In addition to its strong technical backdrop, VZ's fundamental forecast is also looking quite sunny. On Monday, Piper Jaffray analyst Gene Munster sounded off on Apple Inc. ( AAPL ), the iPhone, and Verizon. Munster said that he sees the launch of an iPhone compatible with Verizon as a "95%" certainty in March of 2011 -- an event that many VZ customers have been holding out for.

With VZ's technical -- and fundamental -- picture looking pretty bright, we could see the recent trend toward call buying continue. As more bulls flock to VZ's camp, the resulting buying pressure could help the communications issue extend its quest for new highs.



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This article appears in: Investing , Options

Referenced Stocks: AAPL , CBOE , VZ

Schaeffer's Investment Research

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