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Option Bulls Circle DryShips Inc (DRYS)

Upbeat chatter about tanker demand has sparked a run on DRYS call options

by 3/22/2013 9:26 AM
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The shares of DryShips Inc. (NASDAQ:DRYS - 2.09) rallied almost 9% on Thursday, but stopped short of their 32-week moving average -- a trendline that's contained all but a handful of the stock's rally attempts since May 2012. Nevertheless, option traders are eyeing even more gains for the shipping concern in the short term, buying out-of-the-money calls to bet on a breakout.

By the closing bell, DRYS had seen roughly 18,000 calls cross the tape -- six times the norm. For comparison, fewer than 500 DryShips puts were exchanged. Most popular was the 2.50 strike, which saw around 4,500 April-dated calls and 2,900 May-dated calls change hands. The majority of the calls traded on the ask side, and open interest increased at both strikes overnight, hinting at newly bought bullish bets.

By purchasing the April 2.50 calls at a volume-weighted average price (VWAP) of $0.04, the buyers will begin to profit if DRYS topples the $2.54 level (strike price plus VWAP) within the next month. Meanwhile, breakeven on the May 2.50 calls is $2.59, as the VWAP of the back-month contracts was more than double that of the front-month, thanks to twice the time value. In any case, the most the buyers can lose is the initial premium paid for the calls.

Of course, in order for the calls to move into the money, DryShips Inc. will have to conquer the aforementioned 32-week moving average, which is currently dawdling in the $2.10 neighborhood. In pre-market trading, DRYS is pointed 3.8% higher, as investors continue to cheer upbeat chatter about tanker demand from the Capital Link International Shipping Forum in New York. According to analysts attending the conference, investors believe rates could've just bottomed.

Weekly Chart of DRYS since April 2012 with 32-Week Moving Average


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