Bears Bank On 500.com Limited (WBAI) to Reverse Course

500.com Ltd (NYSE:WBAI) is sharply higher today after China's government lifted a temporary ban on online lottery sales. At last check, the gaming stock was 18.2% higher at $12.32, and the biggest gainer on the Big Board. Nevertheless, options traders aren't buying the hype.

Diving right in, intraday call volume is running at 1.5 times the average intraday clip, but the contracts are still outstripped by puts on an absolute basis. The most active WBAI options are the April and June 12.50 puts, which are both seeing likely buy-to-open activity, as speculators wager on the stock to reverse lower between now and the respective expiration dates.

Bearish bets have been popular in recent weeks. During the last 10 trading days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than 3,800 WBAI puts have been bought to open, versus fewer than 430 calls -- a nearly 9-to-1 ratio.

Short interest has been on the rise, too. During the most recent reporting period, short interest swelled 57.2%, and now makes up 23.4% of WBAI's total float -- though this would take less than two days to repurchase, at the stock's typical daily trading levels.

The overwhelming negativity can be explained by looking at the charts. Prior to today's news-induced gains, 500.com Ltd (NYSE:WBAI) was sitting on a year-over-year deficit of 74%. The shares have also underperformed the S&P 500 Index (SPX) by close to 43 percentage points during the last two months.