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Option Brief: SolarCity Corp (NASDAQ:SCTY) has gained over 10% this morning to trade at $60.45, after agreeing to purchase photovoltaic manufacturer Silevo Inc. for up to $350 million in stock. Not surprisingly, action in SCTY's options pits is heating up -- especially on the call side, where intraday volume is running at eight times the expected pace. What's more, short-term contracts are in demand, as the equity's 30-day at-the-money implied volatility (IV) is 7.9% higher at 61.9%.
Along those lines, SCTY's now in-the-money June 60 call is seeing considerable buy-to-open activity, with the majority of the 4,300-plus contracts traded doing so at the ask price, IV pointed north, and volume outstripping open interest. Even more ambitious, however, is a group of traders targeting the deep out-of-the-money (OOTM) October 75 call. Roughly 2,200 contracts have crossed the tape here -- 65% at the ask price, suggesting they were bought. Also, IV is edging higher, and just 404 contracts reside here, making it safe to assume new bullish bets are being initiated at a volume-weighted average price (VWAP) of $2.54.
The OOTM call buyers will profit if SCTY can muscle north of $77.54 (strike plus VWAP) by the close on Friday, Oct. 17, when the contracts expire. The traders will rack up additional gains with each step north of this breakeven mark, while the most they have to lose is the initial premium paid, should the underlying be resting below $75 at October options expiration. Historically, the shares haven't explored territory north of $75 since mid-March; as such, delta on the contract stands at a slim 0.33, or 33%.
One factor that may work in the call buyers' favor, however, is SolarCity Corp's (NASDAQ:SCTY) high levels of short interest. Specifically, short interest grew by more than 23% in the past two reporting periods, and now represents almost one-quarter of the equity's float. In other words, the stock is poised to benefit from short-covering activity, should it continue to charge up the charts.