Furniture company RH plummeted more than 25 percent the end of last week, but quick option traders have already booked large profits on upside positions after recognizing that the selloff was overdone.
As the stock was tanking last Friday, Investitute’s proprietary programs found that 5,200 June $46 calls were purchased mostly for $0.65 to $0.80 while 5,000 June $45 calls were bought mostly for $0.80 to $1, with volume far above open interest in both strikes. Shares traded for $42.65 at that time.
This afternoon those calls respectively traded up to $1.80 and $2.30, more than doubling in value just one session later. The stock was up less than 8 percent in the same period, illustrating how far options can outperform their underlying options.
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.
RH jumped 7.71 percent to $45.82 today. The upscale retailer, formerly known as Restoration Hardware, gapped down from above $57 on Friday after issuing weak guidance.