$RCII bulls quadruple money

Option traders posted substantial gains in Rent-A-Center today after reports that the company had entered an acquisition agreement with Vintage Capital for $15 a share.

On May 22, Investitute’s proprietary programs showed that 3,500 $11 calls expiring on Sept. 21 were purchased for $0.85 with shares at $10.09. This was clearly a new position, as volume was above the strike’s open interest of 3,328 contracts.

The investors were likely placing a bet that the beaten-down home furnishings rental company would rebound with its future earnings reports. RCII delivered a weaker-than-expected first-quarter report on April 30 but raised free cash-flow guidance to $170 million from $130 million, a bullish indicator.

New purchasers of those September $11 calls paid as much as $3.90 today, more than four times their initial purchase price. The stock rose 46% in the same time frame, a huge move but one that was still far below that of its options 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.

Rent-A-Center was up 22% to close at $14.68 today. The stock has been trending higher since it reported its second-quarter earnings on June 11, but today’s acquisition by Vintage Capital tipped the scales decisively in the bulls’ favor.