Buyout talk fuels gains for $FCAU bulls

Chinese auto makers have express interest in acquiring Fiat Chrysler, according to news reports, and upside option traders are turning large profits as a result.

On July 12, Investitute’s market scanners identified the purchase of 11,000 August $12 calls for $0.40 with shares at $11.50. This was clearly a new position, as open interest in the strike was only 130 contracts before the activity appeared.

Those calls traded up to 0.74 today, nearly doubling in value. The stock rose 11.1 percent in the same time frame, showing how options can far outperform their underlying shares. Investitute co-founder Pete Najarian cited the call buying on CNBC at the time it occurred.

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.

FCAU jumped 8.53 percent to $12.60 after the reports on potential M&A activity today.