Those calls lock in the price that the trader must pay to buy the stock in the next 10 months. They will provide significant leverage to a rally, doubling or tripling from a relatively small move in the share price. But if the stock fails to rise, those options will end up worthless.
iStar , a highly leveraged and heavily shorted commercial real-estate lender, rose 2.4 percent to $7.25 yesterday. It’s been consolidating around that level since late January, when it reported better-than-expected earnings as bad loans declined.
Credit conditions have also been improving for commercial mortgages, with bankers expecting fewer defaults and easier lending standards. Given that backdrop, high short interest, and the relative cheapness of the stock, some investors may think that iStar is due for a rally —especially because it trades at less than half its book value.
Overall option volume in the name yesterday was quadruple its daily average, with not a single put changing hands in the session.
—Russell has no positions in SFI.
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David Russell is a reporter and writer for OptionMonster.