$SPY calls up fivefold at new highs

The SPDR S&P 500 Fund rallied to record levels today, handing exponential returns to bullish option trades opened two months ago.

On Sept. 21, Investitute’s tracking systems detected the purchase of 40,000 December $257 calls at the same time for $1.13 with shares at $249.77. This was clearly fresh buying, as volume was far above the strike’s open interest of 14,610 contracts.

Those calls sold for $6.45 this afternoon, more than 5.5 times their purchase price. The stock rose 5.2 percent in the same time period, underscoring the type of leverage that can be achieved with options.

In several appearances on CNBC, Investitute co-founders Jon and Pete Najarian have repeatedly cited this SPY trade and other large bullish option activity in the exchange-traded fund as a “great indication” of the market’s direction, even at times when it was pulling back.

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.

SPY was up 1 percent to $262.83 today. The exchange-traded fund, which tracks the S&P 500, closed just off an all-time high of $262.90 reached minutes earlier.