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The shares of MEMC Electronic Materials, Inc. (NYSE:WFR - 5.06) extended their earnings-induced rally yesterday, touching a new 52-week peak of $5.24. Against this backdrop, options traders have displayed a relatively rare penchant for calls, with speculators gambling on more long-term upside for the silicon wafer maker.
During the course of the session, WFR saw roughly 40,000 calls change hands -- about 11 times the norm, and more than seven times the number of puts traded. Most active by a mile was the July 5 call, which saw more than 20,400 contracts cross the tape at a volume-weighted average price (VWAP) of $0.77. The majority of the calls traded on the ask side, and call open interest skyrocketed overnight, underscoring our theory of newly bought bullish bets.
By purchasing the calls to open, the buyers expect WFR to continue its upward momentum over the next several months. More specifically, the buyers will profit if WFR topples the $5.77 level (strike plus VWAP) by mid-July, when the options expire. This breakeven represents expected upside of 14% from the stock's closing price of $5.06 on Thursday. However, even if WFR stages a retreat, the most the traders can lose is the premium paid at initiation.
As alluded to earlier, yesterday's appetite for long calls marks a shift in sentiment among WFR's options crowd. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.29 ranks in the 68th percentile of its annual range. Or, in simpler terms, option buyers have picked up WFR puts over calls at an accelerated clip during the past couple of weeks.
Expanding our sentiment scope, we find that options players aren't the only group changing their tune. In the wake of its solid earnings report, WFR scored price-target hikes from RBC, Credit Suisse, and UBS yesterday. Currently, the consensus 12-month price target on the stock is $4.80 -- a discount to WFR's closing price, and suggesting more upward revisions could be in store. In the same vein, just four out of 14 analysts consider the security worthy of a "buy" or better rating, leaving the door wide open for potential upgrades.
Technically speaking, WFR has outperformed the broader S&P 500 Index (SPX) by a whopping 90.6 percentage points during the past three months. Thanks to its recent surge, though, the equity's Relative Strength Index (RSI) rests at 81 -- well into overbought territory, suggesting a rally respite could be in the short-term cards.