AAP's Unusually Active $62.50 Call Isn't a Covered Call. It's a Bullish Bet on a Beaten-Down Stock.
AAP's Unusually Active $62.50 Call Isn't a Covered Call. It's a Bullish Bet on a Beaten-Down Stock..
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Yesterday's markets edged higher with all the major indexes in positive territory on the day.
The S&P 500 was up 0.4%, 0.5% from an all-time high, thanks to strong earnings from Morgan Stanley (MS). Meanwhile, the Nasdaq Composite gained 0.6% on decent moves by Alphabet (GOOGL), Apple (AAPL), and ASML (ASML).
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A stock that did not have a good day was Advance Auto Parts (AAP), the automotive aftermarket parts retailer. It lost nearly 6% on the day on above-average volume. I couldn't find any news to account for the correction.
AAP stock, while up 33% in 2026 despite yesterday's decline, has lost 75% of its value over the past five years. In the past three years, it's traded between a high of $88.56 and a low of $28.89. It is currently trading below the midpoint of the 3-year range.
Which is why the stock's one unusually active option yesterday stands out. Someone made a large bet on its Aug. 21 $62.50 call. I consider the reasons why.
AAP had the fourth-highest Vol/OI (volume-to-open-interest) ratio yesterday at 62.53. As I said earlier, I couldn't find any news to account for the nearly 6% drop.
I do know that the stock's overall options volume was 29,442, 3.4 times the 30-day average. The Aug. 21 $62,50 call accounted for 31% of the day's total, which was the third-highest daily amount over the past three months.
A quick look at the large trades for the Aug. 21 $62.50 shows us that there was a single trade for 8,800 call contracts (96% of the call's volume) at 12:43 p.m. ET.
At first, I thought it could be a Covered Call bet. However, the multi-leg floor trade was a new position. There is another option leg to the trade, which negates the strategy.
Here are both legs. You'll notice that they were both for 8,800 at 12:43 p.m. ET and both to open, making them new positions, not adjustments to existing trades.
The Bull Call Spread involves buying a call and selling another call at a higher strike price. It is a bullish bet on AAP's share price over the next 37 days. Based on yesterday's unusual options activity, I've highlighted long calls between $50 (the second 8,800 trade shown earlier) and $60, combined with short $62.50 calls across the board.
The net debits or maximum losses for the five possible short calls range from $0.95 to $4.70. That translates to between 1.8% and 9.0% of AAP's share price. Anything below 10% isn't a bad deal.
While you might be tempted to go for the lowest cost outlay, the $60 long call / $62.50 short call combination, the risk/reward proposition and maximum profit percentage are virtually identical to the $50 long call / $62.50 short call combination. Yet, the profit probability -- the likelihood of breaking even on the trade -- is much higher for the latter combination. Perhaps that's what the trader/investor from yesterday's two 8,800-call trades was thinking.
In the $50/$62.50 bull call spread scenario above, the breakeven is $54.70 [$50 strike + $4.70 net debit], 5.01% above yesterday's $52.09 closing share price. If we use the data from yesterday's two 8,800-call trades, the breakeven increases to $54.78 [$50 strike price + $4.78 net debit], but the percentage to breakeven drops to less than 1%.
