Chemical bulls roll calls amid reports of key deal nearing approval

Chemical stocks have been heating up, but one big investor thinks the move is just getting started.

The CBOE S&P Chemicals index is up 7 percent so far this year, outstripping the S&P 500’s 5.5 percent gain over the same period. Most of the movement has come from smaller firms, but yesterday brought key news on the biggest names in the industry as Reuters reported that European officials were set to approve Dow Chemical’s (NYSE: DOW) merger with DuPont (NYSE: DD).

DOW pushed to new highs after the headline crossed the wire, followed by a large option trade in the late morning. Roughly 8,200 April 67.50 calls (options to buy a security) were purchased for $0.70 and a matching number of March 62.50 calls were sold for $1.75. It appears the trader exited an existing position in the March contracts and rolled to the higher strike.

Making the adjustment allowed him or her to recover $1.05 of their capital. They now have an additional month for a potential move to occur, but their position will expire worthless if the stock fails to rally.

DOW advanced 4 percent to $63.67 yesterday. It added to gains after the Wall Street Journal published its own story saying that antitrust regulators in Brussels were satisfied with the company’s plans to divest its crop-protection business. Both articles cited unidentified sources and said company officials didn't comment.

Industry peers have advanced amid their own positive news. Chemours (NYSE: CC), coming off a 285 percent gain in 2016, is up another 59 percent this year after settling an environmental-cleanup case. Tronox (NYSE: TROX) has gained 87 percent since December amid a pair of deals intended to streamline its operations and balance sheet. Huntsman (NYSE: HUN) advanced 18 percent after results beat estimates and management raised guidance.

DOW’s next earnings report is estimated for late April, after the 67.50 calls purchased Wednesday expire. Overall option volume was more than twice its average in the last month, with calls outnumbering puts by more than 3-to-1.

In summary, the stock rallied sharply yesterday, and some option traders are positioning for continued upside.