Call buying before Sunoco (NYSE: SUN) earnings

Sunoco Inc. (NYSE: SUN) announced earnings of 27 cents a share, which missed estimates by one cent, after the market closed yesterday, and at least one investor took the opportunity to buy up a hefty number of later-dated calls expecting upside in the stock.

The out-of-the-money August 30 calls crossed the tape 10,000 times around 2 p.m. EST on Thursday versus open interest of just 248 contracts, indicating investors traded these options to open. The majority of these calls crossed at an ask price of $1.15, meaning the majority of the action occurred on the buy side.

Bullish investors who opened these long call positions will make money if SUN shares close higher than $31.15 at August options expiration. That means the stock needs to rally at least 20% in order for this call purchase to turn profits. If the stock climbs significantly prior to August expiration, investors could choose to sell these calls and book profits instead of holding them.

By opening a free virtual trading account with OptionsHouse, you can build a profit/loss diagram to help visualize this trade.

Implied volatility of the August 30 calls closed at 36, compared to a 30-day historical volatility of just 15%.

Analysts expected SUN to announce an earnings loss of 26 cents a share following the market close. The stock closed down 79 cents, or 3%, to $25.70 a share, and the call buying action we saw yesterday afternoon is not a signal for investors to buy up SUN shares. But at least one investor expects the stock to experience upside throughout the next seven months and edged up closer to its October high of around $33.