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Charles Schwab Bulls Look to Make a Quick Profit

Front-month call players are confident in SCHW

by 12/11/2012 9:44 AM
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Bullish speculators have taken a shine to Charles Schwab Corp (NYSE:SCHW - 13.48) lately, according to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the equity sports a 50-day call/put volume ratio of 5.92, indicating calls bought to open have outstripped puts by a margin of nearly six to one during the past few months. This ratio is just one percentage point shy of a yearly peak, meaning traders have been snatching up calls over puts at a near annual-high pace.

This optimistic attitude carried over into Monday's session, as well. Close to 3,700 calls crossed the tape yesterday, which was nearly seven times the equity's average single-session call volume, and more than 39 times the number of puts exchanged. The stock's Schaeffer's Volatility Index (SVI) of 24% ranks higher than just 18% of comparable readings taken during the past year. In other words, the security's front-month options are relatively inexpensive at the moment, making now an attractive time for short-term traders to jump on SCHW's bullish bandwagon.

The front-runner in yesterday's options pits was the December 13 strike, where north of 3,200 calls changed hands -- the bulk of them at the ask price, suggesting they were bought. These contracts traded at a volume-weighted average price (VWAP) of $0.50. Meanwhile, open interest at this strike rose by 2,281 contracts overnight, signaling the initiation of new positions. In order for speculators to secure a profit on these bought-to-open calls, the stock must rise above $13.50 (strike price plus the VWAP) by Dec. 21, which is when front-month options expire. This breakeven rail is just a stone's throw away from Monday's closing price of $13.37.

Elsewhere, short interest on the financial services firm rose by about 7% during the past month, and now accounts for a respectable 4% of SCHW's available float. This raises the possibility that some of the aforementioned call-buying activity could be the result of hedging activity by short sellers. Either way, it would take three days to buy back these shorted shares, at the stock's average daily trading volume.

Meanwhile, the prevailing attitude toward SCHW among the brokerage bunch is one of caution. Only four analysts have deemed the security worthy of a "buy" or better rating, compared to eight tepid "holds," and two "strong sell" suggestions. This wariness is somewhat surprising, given the stock's year-to-date advance of nearly 19%, as well as its year-over-year climb of about 14%. A shift in sentiment among this crowd could inspire additional buying pressure for the shares.

Also of note, the equity managed to finish a second consecutive session atop its 80-day moving average on Monday, which had previously served as resistance since early November. Should the shares keep up their positive momentum, yesterday's bulls could find themselves collecting a profit on their front-month bets.


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