Sony Corporation (ADR)
(NYSE:SNE) was awash in news yesterday, with the consumer electronics giant announcing a new medical equipment partnership with Olympus Corporation
(PINK:OCPNF) and facing rumors of a move into the smartphone business. And while SNE's shares were only up slightly on the day, call traders barraged the stock: roughly 40,000 call contracts changed hands yesterday, nearly 10 times the normal amount and more than 10 times the number of puts traded. Much of this activity, however, was not of the traditional bullish variety.
About half of this call volume was the work of one investor selling out-of-the-money call options to open, possibly as part of a covered call
strategy. Data from Trade Alert
indicates that one investor sold 20,000 May 20 calls to open at the bid price for $0.10 each. In a covered call, the investor collects the premium paid (in this case, $200,000 for the block), thinking the stock probably won't climb above the $20 strike price by the expiration date of May 17. If SNE stays south of this level, the covered call seller keeps the premium as profit as the calls expire worthless. Should SNE climb above $20 -- no matter how high -- the call seller will likely be required to deliver the corresponding shares at a price of $20. This is likely an acceptable selling point for this trader, but he could miss out on potential further gains by being locked into the $20 sale price. Also note that if this investor in fact sold uncovered ("naked") calls, losses are potentially unlimited in the event of a rally in SNE shares.
Sony could very well break through that mark, though, given its recent climb as well as yesterday's news. SNE is up nearly 50% so far this year, and has climbed 74.8% since hitting its annual intraday low of $9.57 on December 5. It has also outperformed the S&P 500
(INDEXSP:.INX) by nearly 43 percentage points over the last three months.
Given this performance, the recent trend in the options markets has been bullish. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), SNE's 10-day call/put volume ratio is a healthy 6.35, meaning traders have bought more than six calls to open for every put in the last 10 sessions. In addition, that ranks in the top 10% of similar readings in the past year, meaning that call buying is nearing an annual high.
This article by James Pilcher was originally published on Schaeffer's Investment Research.
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No positions in stocks mentioned.