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Eagle Bulk Shipping Inc. (EGLE) Traders Forecast a Fundamental Folly

EGLE's April 3 call is seeing sell-to-open activity today

by 3/15/2013 12:07 PM
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Shares of Eagle Bulk Shipping Inc. (NASDAQ:EGLE -- 2.87) are soaring today on no apparent news, and the positive price action has call players piling on. At last check, roughly 2,200 contracts have changed hands, or more than 39 times the average intraday volume for call options. However, delving deeper into the information reveals the majority of this volume isn't necessarily of the bullish persuasion. The lion's share of today's call activity has centered on EGLE's April 3 call. The majority of the 1,973 contracts traded here have gone off at the bid price, and volume is easily outstripping open interest, pointing to sell-to-open activity.

By writing these calls, the traders' expectation is for the stock to remain below the $3 mark through the close on Friday, April 19, when the soon-to-be front-month series expires. In this best-case scenario, the out-of-the-money calls will expire worthless, and the speculators can collect the full potential profit of $0.27, which Trade-Alert indicated was the volume-weighted average price. Additionally, today's selling activity at this strike could also be Eagle Bulk Shipping shareholders implementing a covered-call strategy, in which investors will be required to sell the equity at $3 per share, should EGLE finish north of the sold strike by expiration.

Now appears to be a good time to sell premium at this strike, given implied volatility is currently inflated relative to the stock's 20-day historical (realized) volatility (84% vs. 75.9%). In other words, premium for this call is relatively expensive at the moment.

Expanding the sentiment scope shows that option players have been using calls in the traditional sense in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), EGLE's 50-day call/put volume ratio of 0.75 ranks higher than 85% of other such readings taken in the past year. Simply stated, calls have been bought to open over puts at an accelerated clip.

Technically, Eagle Bulk Shipping has had an impressive showing on the charts over the last few months. Not only has the stock outperformed the broader S&P 500 Index (SPX) by almost 27 percentage points during the past 60 sessions, but the shares have more than doubled since hitting a record low of $1.32 on Dec. 20. As mentioned, EGLE has surged more than 12% higher in today's session, and is now on pace to close north of its 200-day moving average for the first time since April 30.

Fundamentally, Eagle Bulk Shipping Inc. is tentatively scheduled to take its turn in the earnings confessional next week. Earlier this month, sector peers DryShips Inc. (NASDAQ:DRYS) and Diana Shipping Inc. (NYSE:DSX) unveiled quarterly results that missed analysts' expectations, and each pulled back on the heels of their respective reports. Today's call sellers could be expecting the company to follow in the footsteps of its fellow shipping concerns. For EGLE's fourth quarter, Wall Street is calling for a loss of $1.93 per share.


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