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Crocs Traders Think the Rally Isn't Over

Breaking down a bull call spread on CROX

by 1/7/2013 2:29 PM
Stocks quoted in this article:

Plastic shoe maker Crocs, Inc. (NASDAQ:CROX - 15.17) has been popular among call traders lately, with the stock up 26% since touching a two-year low in November. So far today, CROX has seen more than 8,600 calls cross the tape -- about nine times its average intraday call volume, and roughly 20 times the number of puts exchanged. Digging deeper, it looks like one speculator is gambling on an extended rally for CROX, but is hedging his bets just in case.

The equity's out-of-the-money June 18 and June 22 calls have each seen more than 2,500 contracts change hands, mostly in symmetrical blocks marked "spread." The 18-strike calls traded at the ask price of $0.85, suggesting they were bought, while the 22-strike calls crossed closer to the bid at $0.20, implying they were likely sold. Since volume has outstripped open interest at both strikes, it appears the trader established a bull call spread for a net debit of $0.65 per pair of contracts.

By purchasing the 18-strike calls to open, the investor is betting on CROX to surmount the $18 level by June options expiration. However, in order to reduce the cost of the trade, as well as his breakeven level, the speculator simultaneously sold the higher-strike calls. Now, the trader needs CROX to topple the $18.65 level (bought call strike plus premium paid), and is risking just $0.65. Had he simply bought the 18-strike calls, he'd need CROX to conquer the $18.85 level, and he'd have $0.85 at risk.

But, the sale of the June 22 calls also caps his maximum profit potential at $3.35 (difference between strikes minus net debit), no matter how far CROX should sail past the $22 level. The "vanilla" June 18 call buyer's maximum profit potential is theoretically unlimited.

Expanding our sentiment horizon, we find that bullish betting has become par for the course for CROX. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open more than eight CROX calls for every put during the past two weeks. What's more, the stock's 10-day call/put volume ratio of 8.33 ranks in the 70th percentile of its annual range, suggesting option buyers have initiated bullish bets at a faster clip than usual.

At last look, CROX has fallen in tandem with the broader equities market, shedding 1.2% to explore the $15.17 vicinity.


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