PG&E Calls Hot on Bullish Citi Prediction

The analyst thinks the utility stock could double

PG&E Corporation (NYSE:PCG) is among the best stocks on the Big Board today, thanks to some upbeat analyst attention. Specifically, Citigroup upgraded PCG to "buy" from "neutral," and tripled its price target to $33 -- more than double the equity's close on Friday. The analyst believes there's an "increasing likelihood of legislative action" in California in the next two to three months that could be favorable to the utility name, which filed for bankruptcy protection in January amid liability concerns for its role in California wildfires. Against this backdrop -- and ahead of earnings next week -- PCG call options are hot today.

Since touching a record low of $5.07 on Jan. 15, PG&E shares have more than tripled. The stock was last seen 15.4% higher to trade at $17.86, and is on pace to topple its 50-day moving average for the first time since early November -- before the security suffered multiple bear gaps. The $18-$19 area, though, is where PCG landed after an early January bear gap, and contained the stock's downside momentum in mid-November. This region could now act as a speed bump for the equity.

PG&E has seen roughly 49,000 call options change hands today -- almost two times the average intraday call volume, and more than triple the number of puts exchanged. The June 21 call has attracted the most attention, with two blocks totaling 10,000 contracts traded around the bid price, suggesting they were sold to open. By writing the calls to open, the seller expects PCG shares to remain south of $21 through June options expiration.

Meanwhile, it appears "vanilla" call buyers are picking up the June 18 and 19 calls. Buyers of the calls expect PCG to extend its journey higher over the next few months. The calls will move deeper into the money the higher PCG surmounts the $18 and $19 levels before the close on Friday, June 21, when the options expire.

Today's appetite for PG&E calls runs counter to the growing trend. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.73 is in the 75th percentile of its annual range. While this indicates that bought calls have outnumbered puts on an absolute basis, the percentile tells us option buyers have picked up PCG puts over calls at a faster-than-usual pace in the past two weeks.

Echoing that, the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.99 indicates that put open interest nearly doubles call open interest among options expiring within three months. This ratio is higher than 94% of all others from the past year, suggesting near-term traders have rarely been more put-biased toward PCG in the past 12 months.

As alluded to earlier, PG&E is expected to report quarterly earnings next Thursday, Feb. 28. Over the past eight quarters, PCG shares have moved 1.7% the day after earnings, on average, regardless of direction. This time around, the options market is pricing in a much bigger 10.8% swing for the stock next Friday.