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Bullish Aetna Traders Look for a Post-Earnings Pop

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Ahead of earnings, Aetna sees an uptick in November call volume.

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As Aetna Inc. (NYSE:AET) prepares to report quarterly earnings this Thursday, bullish traders came out of the woodwork yesterday. As of yesterday afternoon (October 22), roughly 25,000 calls had traded so far, which is more than seven times the norm. By comparison, just over 1,300 puts had changed hands.

Most popular has been the out-of-the-money November 45 strike, where close to 16,500 calls had been exchanged (as of yesterday) at a volume-weighted average price (VWAP) of $1.16. The majority of these contracts crossed at the ask price, signaling buyer-driven activity. Since this option currently holds open interest of just 2,200 calls -- and with implied volatility last seen more than three percentage points higher -- it's very likely that new positions are being established here. In order for traders to secure a profit on these bullish bets, the stock must trek north of $46.16 (strike price plus average premium paid) by Nov. 16, which is when back-month options expire.

According to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), this preference for buying Aetna calls over puts is par for the course. In fact, the equity's 50-day call/put volume ratio is docked at 3.58, confirming calls bought to open have more than tripled puts during the past few months. This ratio ranks higher than 69% of other such readings collected over the past year, which means traders have been scooping up calls over puts at an accelerated pace.

Likewise, Schaeffer's put/call open interest ratio (SOIR) for Aetna checks in at 0.58, meaning calls almost double puts among the front three-months' series of options. This ratio arrives in the 34th percentile of its annual range, reflecting a healthier-than-usual appetite for calls versus their bearish counterparts.

It should be noted, however, that short interest on the health care benefits company skyrocketed by more than 115% during the past month, and now accounts for nearly 4% of Aetna's available float. This could mean that some of the recent call volume is the result of hedging activity by short sellers.

Meanwhile, although the stock has climbed more than 14% during the past year -- and has bested the broader S&P 500 Index (INDEXSP:.INX) by about 15 percentage points during the last three months -- there is still a fair amount of skepticism toward Aetna among the brokerage bunch. The equity sports 10 "strong buy" ratings, compared to eight middling "holds" and zero "sell" recommendations. This leaves the door open for future upgrades, which could boost the stock higher.

As alluded to earlier, Aetna is scheduled to report third-quarter earnings on Oct. 25, and has topped consensus bottom-line estimates in just two of the past four quarters. Analysts are currently forecasting a profit of $1.34 per share. Should the company manage to pull off higher-than-expected earnings results this week, the stock could rally high enough to reward today's November bulls.

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

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