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Diana Shipping, Eagle Bulk Shipping Flooded By Option Bulls

Short-term call buyers are targeting sector peers DSX and EGLE

by 1/4/2013 12:18 PM
Stocks quoted in this article:

Call traders are taking a shine to drybulk peers Diana Shipping Inc. (NYSE:DSX - 8.40) and Eagle Bulk Shipping Inc. (NASDAQ:EGLE - 2.46) today. Around midday, DSX has already seen more than 1,600 calls cross the tape -- about 19 times its average intraday call volume, and more than 13 times the number of puts exchanged. Likewise, EGLE has seen more than 1,600 calls change hands, far surpassing its typical midday volume of fewer than 100 calls, and more than two times the number of EGLE puts traded thus far.

Turning first to DSX, the equity's near-the-money February 9 call has garnered the most attention, with more than 900 contracts exchanged. Volume has exceeded open interest at the back-month strike, and the majority of the calls crossed at the ask price, hinting at buy-to-open activity.

By purchasing the calls to open, the buyers are expecting DSX to topple the $9 level within the next several weeks. More specifically, the volume-weighted average price (VWAP) of the calls is $0.09, indicating a breakeven level of $9.09 (strike plus VWAP) for the buyers. However, even if DSX fails to continue today's upward momentum, the most the speculators can lose is the initial premium paid for the calls.

From a broader sentiment perspective, today's affinity for bullish bets runs counter to the growing trend seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the stock's 10-day put/call volume ratio of 0.73 stands just 7 percentage points from a 52-week peak, suggesting option buyers have purchased DSX puts over calls at a near annual-high clip during the past two weeks.

Moving on to EGLE, investors are picking up January 2013 3-strike calls. Specifically, nearly 1,000 contracts have crossed the tape on open interest of zero, pointing to an influx of new initiations, and almost all of the calls traded at the ask price, underscoring our theory of buyer-driven volume. Digging deeper, the calls changed hands at a VWAP of $0.09, meaning the buyers will make money if EGLE conquers the $3.09 level within the next couple of weeks.

Similar to DSX, though, today's preference for short-term calls marks a change of pace among EGLE options traders. The security's Schaeffer's put/call open interest ratio (SOIR) of 3.54 indicates that puts more than triple calls among options expiring within three months. Plus, this ratio ranks in the 70th percentile of its annual range, suggesting near-term options players are more put-biased than usual.

At last check, the shares of DSX and EGLE are trading significantly higher, with some attributing the sector tailwinds to expectations for solid shipping rates in 2013. More specifically, DSX has gained 5.5%, bringing its week-to-date gain to 16.7%, while EGLE has skyrocketed 36.6%, and is on pace to end the week 62.9% higher. Elsewhere, DryShips Inc (NASDAQ:DRYS) -- which has also been popular among call buyers -- was last seen flirting with a 17.9% gain.


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