United Continental Holdings Inc (UAL) Bull Targets Record Highs

United Continental Holdings Inc has yet to see the north side of $70

Dec 1, 2014 at 10:26 AM
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After rallying 10.7% last week amid a steep sell-off in crude oil, shares of United Continental Holdings Inc (NYSE:UAL) are down 2.4% this morning to linger near $59.78. However, with the stock's 14-day Relative Strength Index (RSI) perched at 72 -- in overbought territory -- a near-term pullback may have been in the cards. Nevertheless, one option bull in today's session is betting on UAL to bounce back in a big way over the next several weeks.

Taking a quick step back, calls are trading at four times what's typically seen at this point in the day. Short-term contracts are in high demand, as evidenced by the equity's 30-day at-the-money implied volatility, which has jumped 9.8% to 41.5%. Drilling down, almost all of the call volume is a result of one massive block of 10,000 December 70 calls, which was bought to open for $0.24 apiece, resulting in an initial net debit of $240,000 (number of contracts * premium paid * 100 shares per contract).

This is the most the call buyer stands to lose, should UAL settle south of $70 at the close on Friday, Dec. 19, when front-month options expire. Meanwhile, her gains are theoretically unlimited past the breakeven mark of $70.24 (strike plus premium paid), an area the equity has yet to explore.

Regardless of where United Continental Holdings Inc (NYSE:UAL) closes at December options expiration, this trader can rest easy knowing she purchased her short-term options at a bargain. Specifically, the stock's Schaeffer's Volatility Index (SVI) of 39% ranks in the 14th percentile of its annual range, suggesting premium on UAL's front-month options is pricing in relatively low volatility expectations at the moment.

 

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