Whether The Massive Call Buying In Annaly And Other Stocks Is A Signal To Buy

by: Brian Gorban

One of the best bullish indicators I've come across in my close to 15 years of investing is call option buying. The simplest reason is that these are some of the most leveraged derivatives which means that if somebody has a strong conviction of a stock going higher, buying calls allows him to maximize his investment dollars. Lets analyze some stocks that have been experiencing heavy call buying lately:

1) Annaly (NYSE:NLY) is an mREIT I've discussed recently here. On Sept. 27, option volume surged over 3,300% above average with the Oct 2011 $16 calls especially trading heavily with almost 318,000 contracts in volume. At first glance this seems that investors are extremely bullish on NLY and we should jump in as well. However, being the prudent investors that we are, one can see that the company's $.60 ex-dividend date is on Sept. 28 and so it looks to be a case of most shareholders selling covered calls to protect their investment as I recently wrote here. Either way, I still feel NLY is a great buy here trading right near 1x price/book, under 7x price/earnings, and almost 14% dividend yield.

2) Kraft Foods (KFT) is a large holding by Berkshire Hathaway, which I recently wrote about here. The stock's option volume exploded over 1,700% higher than average with the Jan 2012 $20 calls in particular being traded heavily with over 160,000 contracts in volume. Again though, this goes ex-dividend on Sept. 28 and looks to be another case of playing the dividend.

3) AU Optronics (NYSE:AUO) had option volume rise over 3,400% above average with almost 7,200 contracts changing hands specifically on the Jan 2012 $5 calls. The Taiwanese computer peripheral makers has some compelling value trading under .5x price/book, .25x price/sales, and just over .5x enterprise value/revenue. While the company lost about $1.2 billion in net income over the trailing twelve months with ugly operating and profit margins, it still was able to post over $100 million in free cash flow as the company had over $3 billion in depreciation. Either way, this is a nice speculative buy here at $4.15 with either the prospect of a turnaround in their business as the economy looks to rebound or a takeout from these many cash-rich tech companies.

4) Ivanhoe Mines (IVN) option volume increase over 2,500% above average trading volume. The Canadian natural resources company had particularly large call buying in the Jan 2012 and Mar 2012 $25 calls indicating extreme bullishness as those are almost 50% higher than the $17 Sept. 27 closing. This company is heavily tied to the direction of precious metals and I've admitted before I don't have a strong enough conviction where that is going so I have to refrain from giving a recommendation on this stock.

5) United Online (NASDAQ:UNTD) had option volume surge over 1,100% above average trading volume. Investors were specifically buying the NOV 2012 $7.5 calls showing strong confidence as that's well above the $5.65 closing price on Sept. 27. However, there was strong volume of the Nov 2012 $7.5 puts meaning that this could very likely have been a straddle play and in essence buying volatility. Either way, the stock looks compelling trading at 9.5x price/earnings, .5x price/sales, and consistent 7.2% dividend yield. I think this is a buy here at $5.65/share.

6) Maxim Integrated Products (NASDAQ:MXIM) had option volume surge over 1,100% above average trading volume as well. Investors were particularly buying Oct 2011 $25 and $26 calls, however, there was identical volume on the Oct 2011 $23 and $22 puts indicating that investors aren't necessarily bullish but expecting volatility with the upcoming earnings report. Either way, this semiconductor maker has compelling valuations trading just above 15x price/earnings, over $700 million in net cash, a return of equity at 20%, and a dividend yield at 3.7%. I think this is a buy here at $24.50.

7) PPL Corporation (NYSE:PPL) had option volume surge almost 900% above average trading volume as well. This energy and utility company had heavy volume particularly in the Nov 2012 $30 calls which is slightly out of the money and showing that investors expect this to move higher in the next couple of months. The stock trades at just over 12x price/earnings, 1.5x price/book, and just under 5% dividend yield. I think this consistent dividend payer is worth a buy here at $28.85.

Sources: Yahoo and OptionMonster

Disclosure: I am long NLY.