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Verizon Communications Inc. (NYSE:VZ) is trending about 3.3% higher today, following this morning's buzz that the wireless services provider is offering to buy Vodafone Group Plc's (ADR) (NASDAQ:VOD) 45% stake in Verizon Wireless for as much as $125 billion. As a result, calls are flying off the shelves, with about 57,000 contracts traded thus far -- more than seven times the norm, and almost double the number of puts exchanged. At last check, the equity's 30-day, in-the-money implied volatility reading had surged 19.8% -- 3.6 percentage points – to 21.7%.
Most popular by a mile is the September 50 call, which has seen nearly 11,000 contracts cross at a volume-weighted average price (VWAP) of $0.31. A large portion of the volume went off at both the bid and ask prices, implied volatility has ticked higher, and volume exceeds current open interest levels -- all signaling a mix of sell- and buy-to-open activity at this strike.
In order for the call buyers to secure a profit, VZ must power north of $50.31 (strike price plus the VWAP) by front-month expiration. This reflects a premium of 4.6% to the stock's present perch at $48.11, as well as an area not conquered on a daily closing basis since July 30. The delta for this option stands at 0.23, implying it has a roughly 1-in-4 chance of moving into the money ahead of the close on Sept. 20.
Still, even if the equity stays south of the strike price between now and then, the most traders risk parting with is the initial premium paid for their long call positions. Another possibility is that these call buyers are actually skeptics in disguise looking to hedge their bets amid today's developments, as short interest accounts for nearly seven days' worth of pent-up buying demand, at the stock's average pace of trading.
Conversely, the call sellers are counting on VZ to remain below $50 over the option's lifetime. This would render the call worthless, and enable the traders to pocket the net credit received (which also represents the maximum profit on the play). It should be noted, however, that if the stock does manage to ascend past the strike price, the sellers may find themselves on the hook to deliver the shares for $50 apiece, no matter how far VZ climbs over the next few weeks. This activity could also denote a covered-call strategy.