Buying (and more buying) in Chubb (NYSE:CB) options

CB)" src="http://oh-image.s3.amazonaws.com/September/100914CB.jpg" border="0" alt="Call buying in Chubb (CB)" width="192" height="154" /> Chubb CB is a U.S.-based insurance company offering both commercial and personal services. News has been sparse on the firm since its July 22 positive earnings surprise. The stock itself, however, has been quietly strolling higher, up more than 16% since early July to hit a new 52-week high in Monday's trading.

This positive price action hasn't gone unnoticed, at least for one institutional trader. In Monday's trading session, both the January 60 and 65 calls were the site of heavy buying action as a large-scale trader scooped up thousands of these out-of-the-money calls.

In early trading, the January 60 call saw a block of 10,310 contracts trade for $1.31 apiece – $1.35 million in total premium. Additionally, a block of more than 14,700 contracts traded on the January 65 call for 37 cents apiece, or roughly $544,000 in total premium. Both blocks traded relatively close to the ask price at the time of execution, indicating they were bought to open.

The 60 call closed up 33 cents on the day, about eight cents higher than its delta would suggest given Chubb stock's 77-cent rise to close at $56.82. The 65 call, meanwhile, closed 13 cents higher; this was also a wider move than its delta indicated. This indicates the buying interest has increased the implied volatility in these options.

Given that this trade is buying out-of-the-money calls on a stock that is at a new 52-week high makes it evident that the trader in question is definitely bullish on CB through the next four months or so through January expiration. The risk to a long call is 100% of the premium paid, which occurs at expiration if the underlying stock is trading below the strike price.

Gains on long calls, on the other hand, are theoretically unlimited should the stock rally beyond the breakeven price. Breakeven for the 60 and 65 calls, respectively, are $61.31 and $65.37. These are the breakeven levels at expiration; option traders can always close out their positions at any time by selling the positions and taking profits (or containing losses).

CB is next expected in the earnings confessional on October 21. Analysts are expecting per-share results of $1.29, a 17% decline from year-ago levels. Also this type of extraordinary large activity in out-of-the-money calls can start the takeover rumor mill spinning. Mr. Buffett, are you out there?

Photo Credit: Tom Purves

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