(NYSE:PAY) is trading roughly 7% higher today. The positive price action isn't being ignored in the options pits, where calls have easily emerged as the contracts of choice. Nearly 10,000 calls have changed hands as of 11:20 a.m. EDT, representing five times the average intraday call volume, and more than four times the number of puts exchanged. The stock's April 23 call is the most active strike, with traders betting on additional upside in the near term. The majority of the roughly 3,200 contracts traded here have crossed at the ask price, and volume is outstripping open interest, suggesting new bullish positions are being initiated.
By purchasing the out-of-the-money calls, traders expect PAY to land north of the $23 mark by the close on Friday, April 19, when the back-month options expire. More specifically, the volume-weighted average price (VWAP) for the calls is $0.66, meaning speculators will begin to profit with each step north of breakeven at $23.66 (strike plus VWAP) the stock takes over the next five weeks. Delta for the call is currently resting at 0.34, or 34%, suggesting a more than 1-in-3 chance the options will finish in the money by expiration.
Should PAY fail to rise the 4.9% needed to topple the strike price, the most today's call buyers stand to lose is the initial premium paid. With implied volatility at this strike deflated relative to the stock's 20-day historical (realized) volatility (43% vs. 198.2%), the traders can rest easy knowing they picked up these calls on the cheap.
Today's trend toward calls is just more of the same in PAY's options pits, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 10 sessions, traders have bought to open 10,280 calls, compared to 2,331 puts. The resultant call/put volume ratio of 4.41 ranks higher than 83% of other such readings taken in the past year, pointing to a healthier-than-usual appetite for bullish bets over bearish in recent weeks.
Additionally, the equity's Schaeffer's put/call open interest ratio (SOIR) has dropped to 0.43 from 0.59 since February 22, as call open interest rose more than 32%. This ratio is docked in the fourth percentile of its annual range, implying short-term speculators have rarely been more call-heavy.
On the charts, PAY has had a rough go of it in 2013. In addition to lagging the broader S&P 500 Index
(INDEXSP:.INX) by north of 38 percentage points during the last two months, the stock has shed about a quarter of its value year-to-date. However, the lion's share of these losses came on the heels of a late-February profit warning, and the equity has bounced around 22% from its February 21 low of $17.93.
As mentioned, the security is continuing this rebound in today's session after last night's management shake-up prompted some bullish brokerage attention
this morning. At last check, PAY could be found lingering near $21.92.
This article by Karee Venema was originally published on Schaeffer's Investment Research.
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