The New Year hasn't begun yet, but investors are already looking
far into the future.
Some 310,268 contracts expiring in January 2013 traded yesterday,
almost double the total on Friday, according to optionMONSTER's
tracking systems. The increased activity, which occurred in stocks
such as Microsoft, H.J. Heinz, and Chubb, was noteworthy because it
occurred in a session when overall option volume was 6 percent
The trades reflect a belief that stocks are likely to continue
rising over the next two years, following a 19 percent rally in the
S&P 500 since mid-2010.
MSFT, for instance, saw the purchase of almost 23,000 January 2013
32.50 calls for $2.33 and $2.40 against open interest of just 6,341
contracts. The software giant closed the session at $27.25 and
would need to climb at least 28 percent by expiration for the
positions to turn a profit.
CB and HNZ had almost all their activity focused on the January 13
contracts, which are sometimes known as LEAPS (Long-term Equity
AnticiPation Securities). Traders bought more than 4,000 contracts
in the 75 strike on the insurer for $2, indicative of a 29 percent
rally from its $59.65 close yesterday.
In HNZ, the buying focused on the January 2013 55 calls for $2.10.
That means the food company's stock needs to climb 15 percent for
the trade to turn a profit.
Campbell Soup experienced similar activity at the 40 strike, where
a block of 4,761 contracts was purchased for $1.80. The shares
closed at $34.52, and need to appreciate 21 percent by expiration
for the trades to turn a profit.
Overall volume was more than 13 times greater than average in CB,
HNZ, and CPB.
Investors can use long-term calls in at least two ways. One is lock
in future prices where they wish to own a stock. For instance, a
portfolio manager may expect to receive more funds at some point
over the next 1-2 years and wishes to hedge against the shares
rallying before they're ready to buy.
Alternatively, the calls will appreciate from the underlying stocks
moving higher, even if they don't reach the strike price. See our
Education Section for more.
(Chart courtesy of tradeMONSTER)
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