Calls Hot as Applied Optoelectronics Shorts Get Squeezed

Call buying on the major options exchanges is near an annual peak

May 31, 2018 at 11:14 AM
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Shares of Applied Optoelectronics Inc (NASDAQ:AAOI) are up 9.2% today to trade at $44.34 -- bringing their week-to-date gain near 28.6%, which would mark their biggest weekly gain since February 2014 -- and some are crediting a short squeeze for the upside. Whatever the reason, options traders are positioning for even bigger gains, with calls running at an accelerated clip.

At last check, more than 12,000 AAOI calls have changed hands, nine times what's typically seen, and volume pacing in the 99th annual percentile. By comparison, just 2,600 puts have traded so far.

Most active is the weekly 6/1 45-strike call, where 6,292 contracts are on the tape. It looks like new positions are being purchased here for a volume-weighted average price of $0.21. If this is the case, breakeven for the call buyers at tomorrow's close is $45.21 (strike plus premium paid)

This bullish bias just echoes the growing trend seen in AAOI's options pits in recent weeks, albeit amid relatively low absolute volume. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 10.55 ranks in the 100th annual percentile, meaning long calls have been initiated over puts at an unusual clip.

Some of this activity has likely been at the hands of short sellers hedging against any additional upside risk. While short interest fell 7.2% in the most recent reporting period, there are still 10.4 million AAOI shares dedicated to these bearish bets -- almost 80% of the stock's available float, and 10.4 times the average daily pace of trading.

Regardless, it's an attractive time to buy premium on AAOI's short-term options. The equity's Schaeffer's Volatility Index (SVI) of 59% ranks in the 15th percentile of its 12-month range. This indicates lower-than-usual volatility expectations are being priced into near-term contracts.

Looking closer at the charts, Applied Optoelectronics shares have nearly doubled since their early April annual lows near $22.50. The fiber optics stock is currently pacing for its sixth straight gain -- its longest daily win streak since last July -- and is breaking free from its 200-day moving average. AAOI still has a lot of ground to make up, though, considering it's still staring at a 38% year-over-year deficit.

aaoi stock daily price chart may 31

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