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Option Bulls Hone In on Hewlett-Packard Company (HPQ)

Are HPQ call buyers expecting a post-earnings breakout?

by 2/14/2013 11:10 AM
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The shares of Hewlett-Packard Company (NYSE:HPQ - 16.99) are following the broader equities market into the red, and continue to dawdle beneath their psychologically significant 200-day moving average. Nevertheless, options traders are rolling the dice on a short-term breakout for the blue chip, as evidenced by the accelerated call buying of late.

Within the first 90 minutes of trading, HPQ has seen about 39,000 calls cross the tape -- more than three times its average intraday call volume. On the flip side, just over 5,900 HPQ puts have changed hands, far fewer than the normal 11,000 contracts.

The vast majority of the calls have traded at the March 18 strike, which has seen more than 24,400 contracts traded on open interest of fewer than 8,200, pointing to an influx of fresh initiations. Digging even deeper, most of the action transpired in one fell swoop, with a block of 17,000 contracts exchanged at the ask price of $0.40, suggesting they were bought.

By purchasing the calls to open, the buyers expect HPQ to muscle atop the $18 level within the next month, which encompasses the firm's turn in the earnings spotlight one week from today. More specifically, the investors will reap a reward if the equity conquers the $18.40 level (strike plus premium paid) by the closing bell on Friday, March 15, when the soon-to-be front-month options expire. However, even if HPQ remains south of the aforementioned trendline -- which has ushered the stock more than 60% lower over the past two years -- the most the buyers can lose is the initial premium paid for the calls.

Daily Chart of HPQ since February 2012 With 200-Day Moving Average

As alluded to earlier, today's appetite for bullish bets has become par for the course among HPQ speculators. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open almost two HPQ calls for every put during the past 10 sessions. Even more telling, perhaps, the security's 10-day call/put volume ratio of 1.88 registers in the 71st percentile of its annual range. In other words, option buyers are scooping up calls over puts at a faster-than-usual rate.

Historically, HPQ has topped the Street's bottom-line earnings estimates in each of the past four quarters.


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