Perhaps I should all the recent call option activity in Lender Processing Services (LPS) should not surprise me given a massive foreclosure deal between banks and federal and state governments arriving ahead of earnings on February 13. However, after seeing single-day large call volume in December and then again on February 6, I was caught off guard observing yet another surge in call action on February 7. This time, 1200 calls traded on the March $18 strike. Open interest at this strike is now 4,991 call options.
When 8313 call options traded hands the previous day, LPS closed for a large 4.8% gain that took the stock above its 200-day moving average (DMA) for the first time in 10 months. This time, the next day, LPS jumped for fresh gains only to pull back for a loss on the day despite the call option activity. LPS is now resting on top its 200DMA.
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LPS trades around its 200DMA as call volume continues to surge
Given the lukewarm reaction to this latest scramble for calls, I began to wonder whether the primary motivation for the call volume was to capture risk premium ahead of earnings and/or covered call action to hedge existing shares. Accordingly, I decided to sell March $17 calls against some of my own stock.
When LPS reports earnings on February 13th, I will be keenly interested in management's assessment of the foreclosure deal and whether it has brought any new certainty to the business or removed any overhang. If so, I will be comfortable adding to positions on the next dip. If not, I will continue to hold tight and brace myself for more volatility ahead.
Be careful out there!