Call Buyers Active in Tiffany & Co. (NYSE:TIF)

An investor who may be anticipating a slew of robin's-egg-blue boxes under various loved ones' trees this holiday season could be enhancing and extending his bullish trade in Tiffany & Co. TIF. At least that's what some recent option activity could be indicating.

Wednesday morning, we saw large block trades on the Tiffany January 60 and February 70 calls. The in-the-money January 60 call saw a block of 4,400 calls trade on open interest of 6,212.  The calls traded for $4.50, which was the bid price at the time.

It looks as though the investor was selling to close these calls, capturing $1.98 million in premium from the sale.  The stock is up 46% year-to-date and is up 40% in the last six months, following a steady uptrend toward a new 52-week high.

It is therefore likely that these calls were being closed out at a profit. In fact, it looks as though an investor bought 6,000 of these calls for 75 cents as part of a spread on October 26. If this was indeed the same investor, that's a profit of 500% in just over a month!

But this investor does not appear to be finished with his bullish outlook on Tiffany. Shortly after the January 60 calls traded, the far-out-of-the-money February 70 calls saw a block of 8,800 contracts trade on open interest of just 193 contracts. These traded for $1.25 each, or $1.1 million in premium.  It appears he bought twice as many new out of the money calls as this was the offer price at a time.

So summing up, it looks as though an investor made a healthy profit in the January 60 calls and has opted to roll the bullish position out and up in the February expiration month, to the 70 strike using a 1X2 diagonal spread. This new strike is currently out-of-the-money by $7.25 with TIF shares trading at $62.75. Delta on this call is currently about 25, meaning it will theoretically gain (or lose) 25 cents for every $1.00 advance (or decline) in TIF shares.

At expiration, this investor risks losing 100% of the premium paid if TIF is below the 70 strike.  Above breakeven of $71.25, gains are theoretically unlimited. But if past behavior is any indication of the future, the investor may not hold the position through expiration and may instead choose to keep rolling it forward (provided that Tiffany continues to move higher).

Photo Credit: sunshinecity

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