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Lender Processing Services (NYSE:LPS) has gained 31% year-to-date. This jump follows the activity of intrepid traders/investors who loaded up on LPS June $21 call options in December - these call options have now roughly doubled in price. Call buyers rushed in after LPS dropped 17% in one day after the company's legal woes worsened. In parallel, LPS's new troubles emboldened shorts to return after a steep 4-month drop in short interest. In the four weeks following December 15, short interest in LPS jumped 44%. Shorts were 6.8% of LPS float as of January 13, 2012.

Shorts rush back into LPS after the company suffers a legal setback in Nevada

click to enlarge

Shorts rush back into LPS after the company suffers a legal setback in Nevada

Source: NASDAQ.com

Buying volume in LPS shares has significantly increased over the past two days as the stock sliced right through 10-month resistance at the 200-day moving average (DMA). The chart below shows this strong move which follows a successful retest of the lows created by December's plunge.

LPS surges to a 3-month high and restarts recovery

LPS surges to a 3-month high and restarts recovery

Source: FreeStockCharts.com

Adding to the intrigue was a surge in call buying in the February 19 strikes. A total of 8,313 call options traded hands versus 175 calls in open interest. Either shorts are rushing to hedge their positions or the catalyst that encouraged traders to load up on June $21 call options has been rescheduled to arrive four months early. Regardless, I consider it very bullish to see strong buying volume matched with outsized call trading/buying accompanied by a break of critical resistance levels. Note well that the 831,300 shares represented by these call options equal of 63% of the 3-month average trading volume in shares of LPS.

I am maintaining my bullish position, and I will be watching trading more closely than usual until the market gets to option expiration next week.

Stay tuned and be careful out there!

Source: Turn-Around Continues For Lender Processing Services As More Call Buying Counters Increasing Short Interest

Additional disclosure: I am also long LPS call options