Stocks quoted in this article:
DryShips Inc. (NASDAQ:DRYS) followed in the bearish footsteps of the broad market on Friday, and by the time the dust settled, the stock had surrendered 3.8% to finish at $2.04 -- one penny above its intraday low. Amid this negative price action, option volume accelerated -- trading at more than four times the average daily volume. As such, DRYS' 30-day, at-the-money (ATM) implied volatility jumped 9.1% to 55.8%. Calls easily emerged as the options of choice, and when the closing bell rang, around 18,000 calls had crossed the tape, versus 1,608 puts.
A number of speculators bet on DRYS to maintain its foothold atop the $2 mark throughout the next five weeks by scooping up the September 2 calls. The majority of the 4,261 contracts traded did so on the ask side, implied volatility shot 14.9 percentage points higher, and open interest jumped over the weekend. Summing it all up, it seems safe to assume that a fresh batch of bullish positions was initiated.
While the September 2 calls are barely sitting in the money, DRYS must make its way above breakeven at $2.20 (strike plus the volume-weighted average price of $0.20) before the close on Sept. 20, in order for Friday's bulls to turn a profit. The stock has not traded north of this breakeven level since late May, and it's a coin toss as to whether the call will remain in the money during the course of its lifetime, as delta for the option is docked at 0.50, or 50%.
Friday's preference for calls over puts just highlights the withstanding trend seen in DRYS' options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 42,346 calls throughout the last 50 sessions, compared to 1,027 puts. What's more, the resultant call/put volume ratio of 41.23 ranks in the 99th percentile of its annual range, meaning long calls have been initiated over puts with more rapidity just 1% of the time within the past year.
However, given that DRYS is lingering in the $2 neighborhood, it's not surprising to see option players initiating bullish bets over bearish. Remember, the maximum potential profit of a long put is capped at the strike price less the premium paid. In other words, with DRYS trading at such low levels, the full reward for buying a put is limited.
On the charts, DRYS has had an erratic showing in 2013, but seems to have made some headway lately. Specifically, the shares are up around 22% from their late June low of $1.65. Plus, the stock has found a technical friend in the form of its 32-day moving average, which previously served as resistance in mid-June, but switched roles to lend a supportive hand in mid-July. However, broad-market headwinds are continuing to apply pressure to DRYS today, and the equity was last seen 1.7% lower to trade at $2.01.