Stocks quoted in this article:
Level 3 Communications, Inc.'s (NYSE:LVLT - 23.13) 6.6% pop in today's session has attracted the eye of bullish option traders. While option volume has accelerated on both sides of the aisle on no apparent news, calls are easily winning the numbers race. Around 14,000 calls have crossed the tape so far, compared to fewer than 2,300 puts. One of the more popular strikes is LVLT's January 2013 22 call, which has seen roughly 3,700 contracts trade. Nearly all of these have gone off at the ask price and open interest at this strike is only 213 contracts, making it safe to assume a portion of today's volume is of the buy-to-open variety.
These bullish bets were placed with the expectation that LVLT will finish above $23.50 (the strike plus the volume-weighted average price [VWAP] of $1.50) by Jan. 18, when these back-month options expire. Today's price action has had the stock on both sides of this breakeven mark, but at current levels, LVLT needs to rise about 1.6% to make these calls profitable.
From a wider sentiment standpoint, calls have been the options of choice on LVLT for some time now. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open almost 10 calls for every put during the past 50 sessions. This resultant call/put volume ratio of 9.96 ranks just 5 percentage points from a 52-week peak, indicating calls have been scooped up over puts at a near annual-high clip in recent months.
This trend is echoed in the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.41. Not only does this show that call open interest more than doubles put open interest among options expiring in three months' time, but it ranks in the 40th percentile of its annual range. In other words, short-term speculators are slightly more call-heavy than usual toward LVLT.
Checking out the stock's technical backdrop sheds some light on this bullishly skewed bias among option traders. In addition to outperforming the broader S&P 500 Index (SPX) by more than 12 percentage points during the past 20 sessions, the stock is sporting a respectable 36% year-to-date gain. Additionally, with today's surge higher, the equity is on pace to finish today's session atop its 200-day moving average -- a feat not accomplished since Oct. 22.
At last check, LVLT was hovering near the $23.13 mark. Should the equity be unable to maintain this upward momentum over the next four weeks, the most today's call buyers stand to lose is the initial premium paid.