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Options: Why Novellus is Heating Up

Options action is heating up in Novellus Systems after Bank of America/Merrill Lynch upgraded the stock to "buy."

Overall Novellus call volume exceeded puts by almost 9 to 1, reflecting a broadly bullish sentiment toward the chip equipment maker. Most of the activity consists of bullish call buying and selling.

In the largest trade, an investor sold 3,000 September 17.50 calls for $1.85, according to OptionMonster's tracking systems. The transaction occurred less than a minute after a large number of shares were purchased for $17.10, indicating a "covered call" strategy.

By purchasing the stock and selling the calls, the investor reduced his or her cost basis to $15.25. In exchange, they lost the right to profit from Novellus rallying above $17.50.

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Options Education:

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Novellus rose over 8 percent to more than $17 in afternoon trading and has traded between about $15.70 and $18.70 since late March. Merrill Lynch raised its price target on the chip-equipment company to $20 and said it will benefit from cost cuts and the introduction of new products.

Traders also bought the May 15 calls betting on a quick rally in the shares. More than 2,000 contracts changed hands today for $1.40 to $2.30 against open interest of 1,547 contracts. Purchases accounted for at least 65 percent of the volume.

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David Russell is a reporter and writer for OptionMonster.

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