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Markets

BJ's (BJ) investor calls for limited rally

Shares of BJ's Wholesale Club Inc. (NYSE: BJ ) could be due for a significant rally during the long term but the upside will be limited, according to one investor who boosted call volume in the March expiration month. Shares of the big box store are outperforming the broad-market losses on the day Friday.

At 1:52 p.m. EDT, a block of 4,000 March 2011 55 calls crossed the tape for $1.15 per contract. This price was closer to the bid when the volume hit the tape. These out-of-the-money calls are home to current open interest of 134 contracts. The investor who traded this lot collected a total of $460,000 on a bet that BJ shares will be trading lower than $56.15 at March options expiration.

The premium collected also represents the maximum profit on this trade in the event that BJ shares remain around their current level or are not trading higher than the strike price at expiration. This trade allows for 24% of upside before investors start to lose money, which is why this is a moderately bearish play.

Maximum loss on this trade occurs if the stock rallies significantly. The call seller continues to suffer losses as the stock moves higher than the breakeven price. In this trade, the investor seems willing to risk unlimited losses to cap maximum profits at the credit.

A closer look at this trade indicates the investor tied the moderately bearish call volume to a stock position, and most likely sold roughly 88,000 shares of stock for $45.32 per share. Tying a stock position turns the options action into a volatility play instead of a directional bet. It looks like the investor is more interested in betting that volatility will come in during the long term.

BJ shares gained four cents to $45.08 during afternoon trading. The stock has recovered from earlier losses of more than 2% after Cowen downgraded the company to "neutral" from "outperform" ahead of the bell today. The company is scheduled to announce earnings figures on Aug. 18 before the market opens. Analysts estimate earnings of 74 cents per share.

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


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

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