$SCHW calls spike 27-fold

Bullish option traders score astronomical profits in Charles Schwab (SCHW) today.

On Oct. 14, our Unusual Activity Service showed that 2,400 Weekly $42 calls expiring tomorrow afternoon were bought for $0.24 and $0.25 above open interest of 21 contracts with shares at $37.67. This was clearly fresh buying, as open interest in the strike was a mere 21 contracts before that session began. Market Rebellion co-founder Jon Najarian discussed the call buying on CNBC’s “Halftime Report” today.

Those calls have traded for as much as $6.73 so far today, 27 times their purchase prices. The stock rose 28.96% in the same time period, a large move but nowhere near 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.

SCHW is up 7.35% to $48.04 in midday trading. The discount brokerage rallied in the pre-market today after CNBC reported that it is in talks to acquired rival TD Ameritrade (AMTD).