WBC Options Spike Before Earnings

WABCO Holdings (WBC) shares jumped more than 3 percent higher Tuesday ahead of Wednesday’s earnings announcement. Options were also heavily traded with 6,543 option contracts trading hands, which is 17x the daily average volume of 378 contracts. The majority of the contracts traded centered around the 45 September ‘08 calls, which ended with an open interest of just 94 contracts. The 50 September ‘08 calls also saw heavy trading with a much larger open interest of 443 contracts.

Investors in the underlying stock appear to be bullish and it may be for good reason. Late last year, billionaire investor Warren Buffett’s Berkshire Hathaway purchased a 2.7 million share stake in the company, which is a vote of confidence in the underlying fundamentals. Then, in April of this year, WABCO raised its fiscal 2008 projections in April by nearly 10 percent, which sent shares even higher before they dropped when the economy turned even more sour.

During the first quarter of this year, WABCO reported record quarterly sales and net income, which were up 26% and 55%, respectively. The North American market contracted by 27 percent during the quarter, but international growth in Asia and Europe more than made up for the losses. Analysts remain divided on this quarter, as vehicle sales have slowed considerably more despite a brief drop in the prices of oil and gasoline, but the company still appears fundamentally strong.

The options activity today suggests that traders rolled up their options to higher strike prices, which is a bullish signal for the upcoming earnings number. After all, the 45 September ‘08 calls are trading at a hefty premium of $2.70 and can be switched up to more than two of the 50 calls premium of just a dollar premium. Essentially, traders could double up on their stock if they believe shares would head north of $51 per share - and they did.

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