Stocks quoted in this article:
The shares of E*TRADE Financial Corporation (NASDAQ:ETFC - 11.26) have tacked on roughly 5.9% so far this week, and are trading just a stone's throw from new-high territory. Against this backdrop, option buyers are showing a relatively rare appetite for calls today, with speculators gambling on a slow, steady ascent for the brokerage firm.
In early afternoon action, ETFC has seen roughly 5,800 calls cross the tape -- more than six times the norm. Most popular is the January 2014 12-strike call, which has seen nearly 4,500 contracts change hands on open interest of 1,401 contracts, pointing to an influx of fresh initiations.
Digging even deeper, most of the volume crossed in one fell swoop, with a block of 3,943 contracts exchanged for $0.97 -- above the ask price, hinting at buyer-driven volume. By purchasing the calls to open, the buyers expect E*TRADE Financial to conquer the $12 level -- a feat not accomplished since September 2011 -- within the next several months. More specifically, the positions will increase in value the higher ETFC sails past $12.97 (strike plus premium paid). On the risk side, the investors stand to lose just the initial premium paid for the calls.
It's worth noting that around the same time, a similar block of puts traded at the January 2014 10 strike for $0.63 -- below the bid price, suggesting they were sold. However, implied volatility is relatively stagnant, and volume has yet to exceed open interest, making it difficult to tell if new positions are being added. Assuming the puts were sold to open along with the bought calls, the trader could be establishing a split-strike version of the synthetic long stock position.
In this instance, the premium received from the sold puts helps to offset the cost of the calls, trimming the net debit to $0.34, and lowering breakeven to $12.34. However, the sale of the puts increases the trader's risk. Should ETFC fall into single digits before January options expire, the speculator could be on the hook to buy the shares at $10 apiece -- a premium to what he'd pay on the Street.
In any case, bullish betting represents a change of pace among ETFC's options crowd. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.41 ranks in the 78th percentile of its annual range, suggesting option buyers have picked up puts over calls at a faster-than-usual clip during the past couple of weeks.
Likewise, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.89 stands higher than 75% of all other readings of the past year. Or, in simpler terms, near-term option traders are more put-biased than usual right now.
Echoing that skepticism, just two analysts consider ETFC worthy of a "buy" or better endorsement, compared to 10 "hold" or worse recommendations. In similar fashion, short interest spiked 28.8% during the most recent reporting period, and now accounts for 8.7% of ETFC's total available float. In fact, at the equity's average daily trading volume, it would take about a week to repurchase all of these pessimistic positions.
On the charts, ETFC has been outstanding, outperforming the broader S&P 500 Index (SPX) by almost 21 percentage points during the past three months. Should the shares extend their uptrend, an unwinding of skepticism among options players, a wave of upgrades, or a short-covering situation could add contrarian fuel to the fire.