$GGB call prices triple

Bullish option traders have forged big profits in steel maker Gerdau.

On April 14, Market Rebellion’s proprietary Unusual Activity systems flagged the purchase 12,800 June $6 calls for $0.30 to $0.35 with shares at $5.60. This was clearly fresh buying, as volume was well above the strike’s previous open interest of 8,208 contracts.

Those calls traded for as much as $0.97 today, about 3 times their average purchase price. The stock rose 22.14% in the same time frame, illustrating how options can far outperform their underlying shares on a relative basis.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

GGB closed at $6.85, up 5.87% on the session. The Brazilian company beat quarterly results yesterday as steel prices surged.

(Disclosure: I am long $GGB.)