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Call traders descended on Sunedison Inc (NYSE:SUNE) at a faster-than-usual pace yesterday, as the contracts were exchanged at more than twice their average daily clip. Of the 74,000 calls that changed hands, the majority did so at a pair of long-term strikes -- specifically, the January 2015 25- and 30-strike calls, where matching 20,000-contract lots traded during the late morning.
The block of January 2015 25-strike calls crossed the tape near the ask price, at $2.42 each, while the January 2015 30-strike calls did so near the bid price, at $1.34 each -- suggesting they were bought and sold, respectively, for a net debit of $1.08 per pair of contracts. Also, open interest soared at both strikes overnight, indicating fresh initiations.
By enacting the long call spread, yesterday's speculator expects SUNE to rally from its current perch at $20.43 past the lower strike by options expiration in January 2015. Furthermore, in order for him to profit at expiration, the shares must surpass breakeven at $26.08 (bought strike plus net debit). At the same time, the trader's potential profit will max out if the stock reaches $30, due to the sold calls -- meaning his maximum potential gain per pair of contracts is $3.92 (difference between the two strikes less the net debit).
However, it's worth noting that short interest jumped 16.4% during the past two reporting periods, and now accounts for nearly a quarter of SUNE's total available float. Considering the spread is so far out of the money, the strategist may have been a SUNE short looking for some long-term options insurance.
Whatever the motive, the trader will sacrifice the net debit if Sunedison shares are hovering at or below the purchased strike when the contracts expire, eight-plus months from now -- assuming he's still holding onto both positions. This works out to a total of $2.16 million ($1.08 net debit * 20,000 contracts * 100 shares per contract).
Technically speaking, SUNE notched a multi-year high of $21.93 in early March, and has nearly quadrupled in value during the last year. Just yesterday, the stock tacked on 5.7%, as it continues to bounce higher after a brief period of consolidation atop its 80-day moving average. Nevertheless, the shares haven't explored territory north of $25 since October 2008.
On the fundamental front, the company is slated to step into the earnings confessional next Thursday morning -- and this could be a good thing for yesterday's headline trader, assuming he's a "vanilla" option bull. Although Sunedison Inc (NYSE:SUNE) has a mixed history under the earnings spotlight -- with four beats and four misses in the past eight quarters -- the shares have averaged a 3% gain in the week subsequent to reporting quarterly figures.