Time Warner call options speculation

Time Warner Inc. (NYSE: TWX) is usually a name that has thin volume in the stock option contract trading each day. I have previously noted at how the stock options could become even more thinly traded if the stock stays over $20 because the options strike prices will only be in every $2.50 increment instead of the $1.00 increments we have been used to for nearly 5-years. The reason for this is that the stock would have to move more than 10% to reach the next strike level instead of 5.5% or 6% as it has previously.

Today there was a 10,000 contract purchase for the December $20 Call options at a price of $0.45. 10,000 option contracts is the same as 1,000,000 shares of common stock on a fully leveraged basis. Usually an options trade like this is more speculative, but it is possible that this is a hedge for a large short-selling position. If we assume that it IS a speculative trade, the stock has to go to $20.45 or higher before December 15, 2006 for that speculative trade to go "in the money." This is most likely a speculative trade, and it probably revolves around the upcoming IPO of Time Warner Cable more than on AOL getting a new boss. The DEC $20 Calls had open interest of 18,529 as of yesterday, so now it looks like the open interest is climbing.

Shares of TWX are now up 2.45% at $20.47 on the day and TWX now has a market cap above the $80 billion mark. The stock's trading volume for each of the last four trading sessions has been under the recent daily average volume, yet the stock has not rolled over. It looks like there is still a general sellers strike where long-term investors are staying with their bets and beliefs that the TWX shares are going higher. Carl Icahn's recent disclosures of a slightly higher stake in TWX may at least signal some of that.