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Bulls come back to Dow Chemical

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Dow Chemical is trading at its highest levels in more than two years, and the bulls are looking for more gains by early next year.

OptionMonster's tracking systems identified heavy buying in the January 42 calls, where more than 8,100 contracts traded for $0.98 to $1.10 yesterday. The volume was well above the strike's open interest of 1,974 before the session began, indicating that new positions were initiated.

These calls can provide a relatively inexpensive way to profit from a rally without necessarily purchasing the stock. But if shares remain below the $42 strike price through mid-January, they could expire worthless.

The trades follow bullish call buying in the September 39 strike on Aug. 9. The premiums on those contracts have more than doubled while the stock has risen less than 4 percent in the same period, showing the kind of leverage that options can provide.

Dow slipped 0.23 percent yesterday to close at $38.65, its highest close since May 2011. The stock had pulled back with the rest of the market earlier this month but bounced near the $37 level last week and has been climbing since.

Total option volume in the name topped 36,000 contracts yesterday, more than double its daily average for the last month. Overall calls outpaced puts by more than 4 to 1.

—By CNBC Contributor David Russell

Additional News: Beware! September headwinds are looming

Additional Views: Cramer: This rallyisn't winding down

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Options Trading School:

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Disclosures:

David Russell is a reporter and writer for OptionMonster. Russell has no positions in DOW.

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