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E*Trade Option Players Gamble On More Upside

Option bulls bought near-the-money calls on ETFC

by 1/2/2013 9:30 AM
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The shares of E*TRADE Financial Corporation (NASDAQ:ETFC - 8.95) have added 16.2% since skimming the $7.70 level in mid-November, and finished Monday atop their 200-day moving average for just the second time since mid-October. What's more, the options crowd is gambling on even more upside for the brokerage house, as evidenced by the growing affinity for long calls.

In the final session of 2012, ETFC saw nearly 2,900 calls change hands -- about three times its average daily call volume. For comparison, just 801 ETFC puts were exchanged.

Most popular was the near-the-money January 2013 9-strike call, which saw more than 1,300 contracts cross the tape. The majority of the calls traded at the ask price, and call open interest at the front-month strike ballooned over the holiday, pointing to buy-to-open activity.

By buying the calls to open, the speculators expect ETFC to surmount the $9 level within the next couple of weeks. More specifically, the volume-weighted average price (VWAP) of the calls was $0.23, meaning the buyers will profit if ETFC conquers the $9.23 level (strike plus premium paid). However, even if ETFC flounders beneath the $9 level, the most the buyers can lose is the initial premium paid for the calls.

Expanding our sentiment scope, we find that Monday's preference for ETFC calls merely echoes the recent trend on the major options exchanges. In fact, option traders have bought to open more than 17 ETFC calls for every put during the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Compared to similar readings of the past year, the stock's 10-day call/put volume ratio of 17.26 ranks in the 87th percentile, suggesting option buyers have initiated bullish bets over bearish at a faster-than-usual clip.

Likewise, the security's Schaeffer's put/call open interest ratio (SOIR) sits at 0.44, indicating that calls more than double puts among options with a shelf-life of three months or less. Plus, this ratio ranks in the 33rd percentile of its annual range, implying that near-term options players have been more call-heavy just one-third of the time during the past year.

Daily Chart of ETFC since October 2012 With 200-Day Moving Average


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