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Pandora Media Inc (NYSE:P) has seen a rush of call activity in its options pits today, which isn't surprising given the stock has jumped roughly 3% on no apparent news. By the numbers, around 13,000 calls have crossed the tape so far -- more than four times the average intraday volume for calls, and north of three times the number of puts that have changed hands. As a result of this increasing demand for P's options, 30-day, at-the-money implied volatility (IV) has soared 9.4 percentage points, or 18.9%, to 59.3%.
Almost two-thirds of today's call volume has centered at three strikes: the August 21, the September 18, and the September 22 calls. Unlike sector peer Sirius XM Radio Inc (NASDAQ:SIRI), it appears option traders are buying to open these calls, as the majority of the collective 8,651 contracts traded at the strikes have gone off on the ask side, implied volatility has soared, and volume is outstripping open interest.
By purchasing the out-of-the-money (OTM) August 21 calls for a volume-weighted average price (VWAP) of $0.25, traders will begin to profit with each step north of $21.25 (strike plus VWAP) P takes through next Friday's close. This breakeven mark represents expected upside of 8.1% to Pandora's current perch at $19.65.
Meanwhile, the VWAP for the further-dated, in-the-money September 18 calls is $2.86, making breakeven $20.86. Delta for the call is docked at 0.68, suggesting a 68% chance this position will remain in the money through expiration on Sept. 20.
Finally, breakeven for the OTM September 22 calls is $22.99 -- a level not surpassed on a daily trading basis since Pandora went public on June 15, 2011 -- considering the VWAP of $0.99. Should the stock fail to topple the strike price, the most the traders stand to lose is the initial premium paid. These speculators are pretty confident in their bullish projections, as IV at this strike is currently inflated relative to the stock's 40-day historical (realized) volatility (65.7% vs. 50%). In other words, premium is relatively expensive at the moment.
Despite the fact that Pandora Media Inc (NYSE:P) has more than doubled in value in 2013, this optimism has limited itself to the options arena. For starters, analysts' consensus 12-month price target of $20 is just a stone's throw from present trading levels. Also, more than 21% of the stock's float is sold short. From a contrarian perspective, an upwardly revised price target could prompt some of the weaker bearish hands loose, adding fuel to P's fire in the process.