Schaeffer's Trading Floor Blog

Option Idea of the Week: Regal Entertainment Group (RGC)

RGC's bearish audience could propel the shares higher

by 9/20/2013 12:21 PM
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Regal Entertainment Group (NYSE:RGC) has been an outperformer on the charts this year, as it sports a 2013 advance of roughly 35%, and tagged a new multi-year high of $19.53 on Aug. 2. What's more, the security's recent pullback was cushioned by its 140-day moving average, after which RGC bounced higher. Given this technical strength, as well as the cloud of pessimism hovering over the movie theater operator, the stock could be poised for further gains over the next few months.

Daily Chart of RGC since December 2012 With 140-Day Moving Average

Exploring RGC's sentiment backdrop, near-term traders have been showing a relative preference for puts over calls lately. The equity's Schaeffer's put/call open interest ratio (SOIR) of 0.62 ranks higher than 78% of similar readings taken during the past year, confirming short-term speculators are more put-focused toward the stock than usual right now. An unwinding of these positions could end serving as a contrarian tailwind down the road.

Meanwhile, short interest on Regal Entertainment spiked by 9.4% during the past two reporting periods, and now these bearish bets represent a lofty 20% of the equity's available float. In fact, it would take more than 31 days to cover these shorted shares, at the stock's average pace of trading. With nearly 16 million shares currently sold short, the security could end up benefiting from a short-covering rally, should RGC continue along its upward trajectory.

This skepticism is evident among the brokerage bunch, as well. The stock maintains just six "buy" or better endorsements, compared to eight "holds" and one "sell" suggestion. Also of note, Thomson Reuters shows an average 12-month price target of $20.19 for RGC, denoting a premium of just 7.5% from the equity's present perch at $18.78. This leaves some wiggle room for a round of upgrades and/or price-target hikes, which could help push the shares higher.

Traders hoping to bet on extended upside for Regal Entertainment Group (NYSE:RGC) may want to think about purchasing the stock's in-the-money January 2014 15-strike calls, which are asked at $4.20 right now. However, since RGC options volume is relatively light, trading may not be as liquid as in other names. Speculators may therefore wish to consider using a limit order to better control their entry and exit prices.

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