Sunday, November 7, 2010

Traders rushed to purchase calls on DAL and DRYS

Option Activity Alert: Delta Air Lines, Inc. and DryShips Inc.

Traders rushed to purchase calls on DAL and DRYS

by Elizabeth Harrow ( 11/5/2010 2:30 PM

Calls were the options of choice on Delta Air Lines, Inc. (DAL) and DryShips Inc. (DRYS) on Thursday, with traders showing a distinct preference for optimistically oriented options. However, with both stocks trading just below familiar technical resistance, it's unclear whether traders are truly bullish -- or just looking to buy some call protection for their shorted shares.
Delta Air Lines, Inc.
Traders favored calls on DAL yesterday, according to data from the International Securities Exchange (ISE). During the course of the session, speculators on the ISE bought to open 1,047 calls on DAL, compared to just 7 puts. The stock's single-day ISE call/put volume ratio of 149.57 confirms a strong bias toward bullish bets over bearish.
In fact, DAL now boasts a 10-day ISE call/put volume ratio of 10.01, as traders have scooped up far more calls than puts during the past two weeks. This ratio arrives in the 75th percentile of its annual range, indicating that options players have purchased calls over puts at a faster pace just 25% of the time during the past year.
This optimistic slant is echoed by DAL's Schaeffer's put/call open interest ratio (SOIR) of 0.43, with calls more than doubling puts among options slated to expire within three months. This SOIR rests in the slim 12th annual percentile, as short-term speculators have been more bullishly aligned only 12% of the time.
The December 15 call was a popular choice on Thursday, with 1,337 contracts crossing the tape. Open interest at this overhead strike rose overnight by 1,017 contracts, confirming that new calls were added.
However, it's worth noting that short interest on DAL increased by 15.3% during the most recent reporting period. In light of this data, it's possible that traders have been buying calls simply to hedge their bearish bets on the airline issue.
DAL has racked up a respectable year-to-date gain of 24.6%, with support from its 10-day and 40-day moving averages supporting the stock's most recent leg higher. However, DAL's Relative Strength Index (RSI) of 72 points to a short-term overbought situation, indicating the shares could be due for a pullback. Plus, the equity's current annual high stands at $14.94, less than a point north of DAL's current price. During the short term, the $15 region could exert some psychological resistance.
DryShips Inc.
DRYS drew a heavy dose of call volume on Thursday, with activity rising to 1.84 times the norm. About 13,000 calls were exchanged on DRYS during the course of the session, easily outpacing the equity's average daily call volume of 7,161 contracts. Meanwhile, only 1,072 puts were exchanged.
On the ISE alone, traders on Thursday bought to open 1,007 calls on DRYS, compared to just 4 puts. The equity's single-day ISE call/put volume ratio of 251.75 highlights a drastic skew toward bullish bets over their bearish counterparts.
The day's upbeat bias was nothing new for DRYS, though. The stock sports a 10-day ISE call/put volume ratio of 11.08, which ranks higher than 82% of other such readings taken during the previous year. In other words, traders have purchased calls over puts at a faster pace just 18% of the time.
In fact, DRYS' SOIR of 0.39 reveals that calls nearly triple puts among near-term options. This ratio rests in the 34th annual percentile, confirming a general mood of optimism among speculative investors.
The most popular DRYS option on Thursday was November 4.50 call, with 3,523 contracts changing hands. About 72% of these calls traded at the ask price, suggesting they were most likely purchased, and open interest rose overnight by 2,136 contracts. With DRYS trading around $4.61 at last check, these calls are right near the money.
Bullishly oriented options are gaining popularity as DRYS prepares for its third-quarter earnings report, which is scheduled to hit the Street in mid-November. But, like DAL, DRYS has racked up a healthy short-to-float ratio of 4.8%, so it's possible that some of these calls were purchased by shorts looking to limit their upside risk.
DRYS has shed about 25% of its value in 2010, with its recent rally attempts fizzling out in the $4.50 to $5 region. The shares are also wallowing beneath resistance at their 32-week moving average, which hasn't been toppled on a weekly closing basis since mid-April.

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