Selling to close long call position in Hewlett-Packard (NYSE: HPQ)


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Options action in Hewlett-Packard Co. (NYSE: HPQ ) during Thursday's session suggests at least one investor could have closed a block of long calls after purchasing them less than three weeks ago.

Shares of the computer company have dropped 50 cents, or roughly 1%, to $52.78 so far on the day. The drop is likely due to the fact that HPQ on Wednesday announced plans to acquire Palm (NASDAQ: PALM ) for $1.2 billion, or $5.70 per share, in cash. Since that announcement, analysis firm Kaufman said it likes the deal and Caris said it is skeptical of the deal. HPQ is due to announce earnings figures on May 18 after the market closes, and analysts polled at Thomson Reuters expect earnings of $1.05 per share.

More than 72,000 November 70 calls changed hands so far today. The bulk of the volume traded around 10:40 EST for a premium of 24 cents per contract. These calls are home to current open interest of more than 74,000 contracts, indicating it's most likely that investors sold to close long call positions. If you recall, I covered a call buyer in the November 70 calls on April 9 in my article called, " Betting on later-term upside in Hewlett-Packard ( HPQ ) ," and today's action could be those same investors selling back these calls. A couple weeks ago, these investors paid 25 cents per contract for these November 70 calls, when the stock was around $53.80 per share. The fact that the options have only dropped about one cent with the stock down $1 is a sign of increased implied volatility. These options had a delta of closer to five, meaning that with the stock lower than it was on April 9, these options should have declined more than one cent. So, on the options action alone, this long call trade from April 9 lost $70,000. But if the option holder was short stock delta neutral against these calls, they could have made $350,000 as the shares declined $1. We don't know for certain if the long call holder was short stock against the calls, but we do know that the implied volatility to exit these calls was higher today, than it was when they were purchased almost three weeks ago.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Options

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Jud Pyle

Jud Pyle

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