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Hewlett-Packard Targeted for Bullish Bet

Breaking down a bull call spread on HPQ

by 11/6/2012 1:22 PM
Stocks quoted in this article:

The shares of Hewlett-Packard Company (NYSE:HPQ - 14.41) are leading the blue chips higher this afternoon, with the stock on pace to end atop its 10-day and 20-day moving averages for the first time since mid-September. Against this backdrop, it looks like one options trader is gambling on an extended rebound for the tech titan, but is hedging his or her bets just in case.

In afternoon trading, HPQ has seen roughly 45,000 calls cross the tape -- more than doubling its average intraday call volume. Nearly half of the action has transpired at the January 2015 10- and 17-strike calls, which saw symmetrical blocks of 10,000 contracts change hands this morning. The 10-strike calls traded at the ask price of $5.13, suggesting they were bought, while the 17-strike calls crossed at the bid price of $2.04, implying they were likely sold. Considering volume has surpassed open interest at both LEAPS strikes, it appears the speculator established a bull call spread for a net debit of $3.09 per pair of calls.

In order to profit on the play, the strategist needs HPQ to remain atop the $13.09 level (bought call strike plus net debit). However, while the sale of the higher-strike calls trimmed the trader's breakeven level and net debit -- which represents the maximum risk on the spread -- it also caps his or her maximum profit potential at $3.91 per pair of calls (difference between strikes minus net debit), no matter how far HPQ should rally north of $17.

Had the trader simply bought the 10-strike calls for $5.13 apiece, his or her profits would increase once HPQ toppled the $15.13 level (strike plus premium paid). On the other hand, the investor would have more at risk without the sale of the higher-strike calls to cushion the initial blow.

From a broader sentiment standpoint, today's bullish -- albeit cautiously -- bet runs counter to the recent trend seen on the major options exchanges. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.75 ranks in the 65th percentile of its annual range. Or, in simpler terms, option traders have bought to open HPQ puts over calls at a faster-than-usual pace during the past couple of weeks.

Echoing that skepticism, HPQ boasts just three "buy" or better ratings from analysts, compared to 14 "holds" and eight "sell" or worse suggestions.

Looking at the charts, though, it's not difficult to see why Wall Street is wary of the blue chip, which has surrendered about 44% in 2012. However, as alluded to earlier, the security is on pace to notch a win atop its 10-day and 20-day trendlines -- a feat not accomplished in about seven weeks. At last check, HPQ has added 2.9% to trade in the $14.41 area.

Daily Chart of HPQ since September 2012 With 10-Day and 20-Day Moving Averages


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