PayPal rallied on merger news in the electronic-payment today, dispensing large profits for bullish option traders.
On May 12, Investitute’s tracking systems detected the purchase of 2,700 July $49 calls for $2.05 as part of a bullish roll with shares at $49.36. Volume was well above the strike’s open interest of 1,960 contracts, showing that this was a new position.
Those calls traded for $5.60 today, a gain of more than 170 percent. The stock rose less than 10.3 percent in the same period, showing how options can far outperform 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.
PYPL rose 3.29 percent today to close at $54.61. The stock rallied after news that another electronic-payment service called Vantiv planned to buy U.K. company Worldpay for $10 billion. PayPal is expected to announce quarterly results after the market closes on July 25.