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Applied Materials, Inc. (AMAT) Call Buyers Busy Ahead of Earnings

Today's Applied Materials, Inc. call buyers may be speculating or hedging short positions

by 5/2/2014 2:24 PM
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Call traders are extremely busy in Applied Materials, Inc.'s (NASDAQ:AMAT) options pits this afternoon, with volume running at more than four times the average intraday clip. Against this backdrop, the semiconductor concern's 30-day at-the-money implied volatility (IV) hit a 52-week high, and was last seen 2.5% higher, signaling strong demand for short-term options. However, AMAT's most active strike doesn't expire for another five-plus months.

Specifically, more than half of the stock's call volume can be traced to the October 24 strike, where more than 18,400 contracts -- including a pair of 8,000-plus-contract sweeps -- have traded. Almost all of the calls there have changed hands at the ask price, suggesting they were bought. What's more, IV is trending higher at the strike, and volume outstrips open interest, making it safe to assume new bullish bets are being initiated -- a theory confirmed by Trade-Alert and the International Securities Exchange (ISE).

Simply put, today's traders are wagering on AMAT rallying past the 24 strike by October options expiration -- a more than 26% gain from the current share price of $19.01. However, given the deep out-of-the-money nature of the calls, and the fact that nearly 6% of the equity's float is sold short (which would take nearly a week to cover, at the security's average daily trading volume), a portion of these bets may be at the hands of short sellers hedging their bearish positions. No matter the motive, the traders' risk is limited to the initial premium paid.

Today's penchant for AMAT call buying has been echoed in recent sessions. The stock's 10-day call/put volume ratio on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) checks in at 15.21, with long calls outnumbering long puts by a greater than 15-to-1 margin in the last two weeks. Also of note, this ratio is just 9 percentage points from an annual bullish acme.

Potentially factoring into this uptick in bullish betting may be Applied Materials, Inc.'s (NASDAQ:AMAT) fiscal second-quarter earnings report, due out the afternoon of Thursday, May 15. The company has bested the Street's bottom-line estimates in seven of the past eight quarters, and last time around, the shares tacked on 6% in the week following a 1-cent earnings beat.


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