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Option Bulls Buy Long-Term Calls on Xerox

XRX will step up to the earnings podium next week

by 1/18/2012 2:00 PM
Stocks quoted in this article:

Copy-machine king Xerox Corporation (XRX - 8.32) has attracted call traders today, with options speculators rolling the dice ahead of the company's turn on the earnings stage one week from today. Furthermore, investors could be reacting to news that David Einhorn's Greenlight Capital Inc. bought shares of XRX in the fourth quarter, which helped the hedge fund return 2.9% in 2011, according to a quarterly shareholder letter.

Whatever the catalyst, XRX has seen roughly 8,600 calls cross the tape today -- more than double its average daily call volume. On the flip side, fewer than 2,500 XRX puts have changed hands thus far.

Upon closer inspection, we find that speculators have shown an affinity for the stock's at-the-money July 8 call, which has seen almost 6,600 contracts traded on open interest of fewer than 2,350, pointing to an influx of new initiations. Plus, 98% of the calls have crossed closer to the ask price, hinting at buyer-driven volume. By buying the calls to open, the options players are expecting XRX to extend its recent ascent north of $8 over the next several months.

From a wider sentiment standpoint, though, it seems today's notable call volume is just more of the same for XRX. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day call/put volume ratio of 30.74 -- indicating that traders have bought to open almost 31 calls for every put during the past two weeks. Even more telling, perhaps, this ratio ranks in the 88th annual percentile, underscoring a healthier-than-usual appetite for bullish bets over bearish.

Further reflecting the growing preference for XRX calls over puts is the security's descending Schaeffer's put/call open interest ratio (SOIR), which now sits at an annual nadir of 0.32. In other words, short-term options players are more call-heavy now than at any other time during the past year.

In afternoon action, XRX has gained 3% to explore the $8.32 level.


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