Call Buying Dominates Eli Lilly Options Action

Eli Lilly & Co. (LLY) did not announce notable news yesterday, but heavy call volume in the January expiration month suggests an investor took a bullish stance on the drug manufacturer.

The out-of-the-money January 37 calls traded more than 5,500 times yesterday versus current open interest of just 2,203 contracts, suggesting that these calls were traded to open. The majority of these calls traded at or near the ask price at 65 cents per contract, likely meaning they were initiated on the buy side. Additionally, implied volatility of these options has expanded to 21. This purchase price means bullish investors who bought these calls need LLY shares to expire higher than $37.65 to make money, unless of course the calls gain value prior to expiration following a rise in the shares and the investor chooses to sell these contracts to book profits.

Another intuitive way to see that it was buyers who dominated the action in these calls was that the call moved higher by more than the delta would suggest. LLY shares closed at $35.25, down seven cents from a closing print of $35.32 last night. But when you adjust for the fact that the stock is ex dividend today by a 42-cent dividend, then that is actually a rally of 46 cents. These calls have a delta of 31, meaning for every dollar-move in the underlying, the January 37 calls should move approximately 31 cents. The calls should have rallied about 13 cents based on the move in the stock. But instead, these calls closed up 20 cents on the day.

Normal daily option volume in LLY is approximately 8,000 contracts, so today’s activity isn’t entirely out of the ordinary. But it is interesting that investors are buying out-of-the-money calls with earnings out of the way. LLY shares closed up 42 cents to $35.25 Tuesday, which means the company’s stock needs to gain 7% to put these options in profitable territory during the next couple of months.