Xerox Corp. (NYSE: XRX ) announced positive earnings ahead of the bell on Thursday, and the good news sent the stock on a big rally during morning trading. Call volume out of the gate in the business equipment name suggest an investor expects the stock to climb even higher during the long term.
Around 9:59 a.m. EST, more than 10,300 at-the-money (ATM) January 2011 9 calls changed hands for an average price of $1.08 per contract. This price was right at the ask when the volume hit the tape. Current open interest in these ATM calls is 1,000 contracts. It looks like an investor opened long call positions on a bet that XRX shares will be trading higher than $10.80 at January 2011 options expiration. While this breakeven price is lower than the stock's 52-week high, it's interesting that this call buyer expects at least 17% of upside throughout the remainder of the year.
If the stock is trading at $10.80 when these calls expire, the investor takes back some of the premium paid. If the stock soars higher and is trading higher than the breakeven price, the investor could make unlimited profits to the upside. Long call trades such as this cap maximum loss at the premium paid, or $1.80 in this particular case. The investor loses the entire debit if the stock drops lower than the strike price.
It is possible that this investor tied the options action to a stock position, turning the bullish action into a delta-neutral volatility play. For the purposes of this article, however, we will focus only on the call volume on the tape.
Ahead of the opening bell today, XRX announced earnings of 24 cents per share. This figure beat estimates by three cents. In addition, the company issued upside guidance for its fiscal year 2010. During morning trading, XRX climbed 8% to $9.08. The stock is trading roughly 21% lower than its 52-week high of $11.72 reached in April.