Option traders who bet on Red Hat’s quarterly results reaped their rewards today.
Just yesterday, Investitute’s market scanners showed that 2,200 Weekly $110 calls that expire this Friday were purchased for $1.60 to $1.72 with shares at $105.68. This was clearly fresh buying, as open interest in the strike was only 303 contracts before the trades occurred.
Those calls rose to $4 this morning, more than doubling in value 24 hours later. The stock was up 7.3 percent at the same time, showing how quickly options can outpace gains in their underlying shares.
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.
RHT jumped 4.08 percent to $110.07 today. The software company rallied after beating quarterly estimates on the top and bottom lines and raising guidance last night.