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Bullish Traders Target Fifth Third's January Options

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As earnings loom, speculators pick up FITB's back-month calls.

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Fifth Third Bancorp (NASDAQ:FITB) has seen a staggering spike in bullish trading activity today, as roughly 23,000 calls have traded so far. This is nearly 39 times the norm, and more than four times the number of puts traded. The clear front-runner has been the January 2013 14 call, where more than 12,600 contracts have crossed the tape -- the majority of them at the ask price, suggesting they were bought. Digging deeper into the data, it looks as though these calls changed hands at a volume-weighted average price (VWAP) of $0.99.

Meanwhile, today's volume exceeds current open interest levels, while implied volatility was last seen 4.5 percentage points higher -- both of which indicate the initiation of newly opened positions. By purchasing these calls to open, speculators are expecting the shares to rise north of $14.99 (strike price plus the VWAP) by January expiration -- just a stone's throw away from current levels.

This accumulation of bullish bets is business as usual for the banking giant. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 3.36 for FITB, indicating calls bought to open have more than tripled puts during the past couple of weeks. This ratio ranks higher than 72% of comparable readings taken within the past year, meaning speculators have been picking up calls over puts at an accelerated clip.

However, not everyone is brimming with optimism for the security. FITB sports 11 "buy" or better recommendations, compared to 12 "holds" and one "strong sell" rating. Still, the stock's average 12-month price target of $16.80 reflects a respectable 12.6% premium to its current price.

This wariness toward the shares is surprising given their year-to-date gain of more than 17%. A look at the charts shows that FITB is on pace to finish the session atop its 50-day moving average for the first time mid-October, courtesy of today's near 2% rise.

It's also worth noting that the company is scheduled to take its turn in the earnings confessional on Jan. 17 -- just one day ahead of back-month expiration -- and has bested analysts' bottom-line estimates in two of the past three quarters. Since the aforementioned January 14 calls are so close to conquering the breakeven rail, it's highly possible that today's bulls will cash in their chips well before FITB posts its quarterly earnings results. However, an earnings surprise to the upside could turn out an even higher profit for the more patient back-month call buyers.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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