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Bulls Tune in to Time Warner Cable

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Back-month calls were the options of choice among yesterday's TWC traders.

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Call trading surged in Time Warner Cable Inc's (NYSE:TWC) options pits yesterday, as 8,774 of the bullishly skewed contracts changed hands -- more than four times the average daily volume, and 16 times the number of puts. The majority of the speculators targeted back-month options, and in particular, the October 120 call, where nearly 5,600 contracts traded, including a block of over 2,200.

Since open interest increased overnight, it's safe to say new positions were initiated. More specific yet, with 95% of the TWC calls going off at the ask price, we can assume a large percentage of the volume was of the buy-to-open variety -- an assumption confirmed by data at the International Securities Exchange (ISE).

The volume-weighted average price (VWAP) for the TWC calls was $1.30. Therefore, for yesterday's bulls to profit, they need the underlying shares to advance from their current position at $107.99, to $121.30 (strike price plus VWAP), by back-month options expiration. In other words, the stock needs to gain upwards of 12% over the next seven weeks for the investors to profit from their transactions. If Time Warner Cable Inc falls short of the strike price, however, the maximum potential loss is the premium paid.

TWC was last seen trading above $120 in early August, before being pressured lower by its 10-day moving average, amid discontentment surrounding its programming dispute with CBS Corporation (NYSE:CBS). According to the option's delta of 0.21, or 21%, the position has roughly a 1-in-5 chance of moving in the money by the closing bell on Oct. 18.

This article by Alex Eppstein was originally published on Schaeffer's Investment Research.

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No positions in stocks mentioned.
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