Schaeffer's Trading Floor Blog

Bears Take Aim at Smith & Wesson Holding Corp (SWHC), Despite Move Higher

SWHC bearish trading activity nears peak levels

by 3/17/2014 11:25 AM
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Put players have been increasing their presence on Smith & Wesson Holding Corp (NASDAQ:SWHC) of late, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, over the past month, the stock's 10-day put/call volume ratio on these exchanges has jumped to 1.18 from 0.09. What's more, the current ratio ranks in the 96th percentile of its annual range, implying puts have been bought to open over calls with more rapidity just 4% of the time within the last 12 months.

This put-skewed trend is echoed in the security's rising Schaeffer's put/call open interest ratio (SOIR). Since Feb. 24 -- the beginning of the current options cycle -- SWHC's SOIR has moved to 0.92 from 0.49, as near-term put open interest more than doubled. Even more telling, the present ratio ranks above all other readings taken in the past 52 weeks, suggesting short-term speculators are more put-heavy now than at any other time within the last year.

In the front-month series, traders have targeted the equity's March 11 strike, which is home to peak put open interest of 8,638 contracts. Since March 3, more than 2,500 contracts have been bought to open here, meaning SWHC needs to retreat 21% from its current perch at $13.92 in order for the puts to be in the money by Friday's close.

The options market isn't too confident of an in-the-money finish, as delta for this put is docked at negative 0.03. Considering the stock is up roughly 21% month-to-date, some of the activity here could be at the hands of shareholders protecting paper profits against any near-term downside.

However, in spite of SWHC's recent run up the charts (thanks largely to a well-received earnings report), traders outside of the options pits have soured on the stock. Short interest rose 10.3% in the latest reporting period to 19.26 million shares -- the heftiest amount of shorted Smith & Wesson Holding Corp (NASDAQ:SWHC) stock in more than seven years. With 35.7% of the equity's float sold short, SWHC is in a prime position to benefit from a short-covering rally, should any of these bears capitulate to its upward momentum.

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