July Breakout? Options Trader Extends Bullish Position in This Major Hotel Operator

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Hotel stocks have consolidated since the winter, and yesterday an options trader extended their stay in one of the biggest names.

Check out this large transaction in Hilton Worldwide (HLT):

  • A block of 25,000 April 115 calls was sold for $38.28.
  • An equal number of July 125 calls were purchased for $32.03.
  • Volume was below open interest in the April contracts but not the Julys. That suggests an investor exited a long position and rolled his or her money forward in time.

Calls fix the level where traders can buy a security. They can gain value when shares rally but lose value to the downside.

Yesterday’s transaction was noteworthy because the strikes were both deep in the money. They effectively simulate a position in HLT at a fraction of the cost. Investors sometimes call this “stock replacement.” Let’s explore the strategy using Delta, the Greek showing how much an option moves relative to its underlier.

Options Delta

The April 115 calls had 99 deltas, meaning they gained $0.99 for every $1 that HLT moves. The July 125 calls had 86 deltas, so they stand to appreciate $0.86 for every $1 the stock goes up. (Delta worked just the opposite to the downside.)

Hilton Worldwide (HLT), daily chart, with select indicators and patterns.

Adjusting the position recovered $6.25 of capital. The new options will track prices less closely because they have 13 fewer deltas. However that number could increase if the shares rally because of Gamma. Rolling to July also gave the investor an additional three months for such a rally to occur. That means they’ll have exposure to the important Memorial Day vacation season.

HLT rose 3.09 percent to $155.13 yesterday, and has been stuck below $160 since November.

Considering the chart and the options activity, the investor seems to expect a breakout by the summer. He or she isn’t sure when it will happen, so they’re using options as a substitute for the shares. The high delta could provide similar dollar moves as owning the stock, but for a fraction of the cost.

The roll was also unusually large for HLT, which averaged just 3,000 options contracts per session in the previous month. Calls accounted for a bullish 95 percent of the total, according to TradeStation Data.

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