Call buyers score big in $MDR

Option traders doubled their money in McDermott today as shares rallied on merger news.

On April 6, Investitute’s market scanners identified the purchase of 4,250 May $6 calls for $0.45 and $0.50 with shares at $5.75. This was clearly fresh buying, as volume was well above the strike’s open interest of 1,108 contracts.

Those calls traded for $1.20 today, more than 2.5 times their initial purchase price. The stock rose 21.9% in the same time frame, illustrating the kind of leverage that can be achieved with options.

Long calls lock in the price where a stock can be purchased, gaining with a rally and providing leverage to the underlying shares. The contracts can quickly lose value if the stock stalls or pulls back but also carry less risk than owning the shares themselves.

MDR jumped 15.7% to $7 today. The stock rallied after the energy construction and engineering company rejected a $2B bid from Norway’s Subsea 7 this morning.