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Option Brief: It has been quite a week for Sears Holdings Corp (NASDAQ:SHLD). On Tuesday, the stock rallied almost 6% after announcing a new senior hire, and today, the equity is up more than 15% after director Thomas J. Tisch disclosed a large stake in the company. This positive price action has not gone unnoticed by option players, who are scooping up calls at a rate of roughly six times the intraday average.
Two contracts receiving notable attention in SHLD's options pits today are the May 38 and 40 calls, and it appears traders are either gambling on an extended uptrend, or hedging against one. Roughly 6,400 contracts have collectively been exchanged at these soon-to-be front-month strikes -- the majority at the ask price. Implied volatility is higher at each strike, and volume surpasses current levels of open interest. In other words, it seems safe to assume that new bullish positions are being initiated.
At last night's close, delta for the lower strike stood at 0.26 and was perched at 0.17 for the higher strike. However, thanks to today's rally, this metric -- which correlates with an option's chance of expiring in the money -- has risen to 0.58 for the May 38 call, and 0.44 for the May 40 call. Meanwhile, risk for both sets of call buyers is limited to the initial premium paid.
One other possible motive behind today's call buying -- particularly at the out-of-the-money May 40 call -- is that short sellers may be hedging their bearish bets against any additional upside. At present, more than 35% of SHLD's stock is sold short, and it would take about 12 sessions to cover, at the equity's average daily pace of trading. With a little over an hour left in the session, Sears Holdings Corp (NASDAQ:SHLD) was lingering near $38.74, and is on pace to notch a 19% week-over-week advance.