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A New High for DreamWorks Animation SKG, Inc. (DWA) Attracts Bulls

Near-term call players converge on DWA

by 8/22/2013 12:53 PM
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DreamWorks Animation SKG, Inc. (NASDAQ:DWA) is following the broader market path higher today, tagging a new two-and-a-half-year high of $30.44 in the process. This positive price action hasn't been lost on the bulls, as north of 5,200 calls have switched hands thus far -- more than 16 times the norm. For comparison's sake, just over 200 puts have crossed the tape. It looks as though two different groups of traders are counting on the entertainment giant to trek even higher in the near term.

Most active by a slim margin is the September 30 call, where 1,634 contracts have been exchanged -- a large portion of them at the ask price, pointing to buyer-driven activity. More specifically, these near-the-money calls traded at a volume-weighted average price (VWAP) of $1.26. Meanwhile, this strike currently holds open interest of just 594 contracts, and implied volatility was last seen 4.2 percentage points higher, confirming our theory of newly added bullish bets.

In other words, speculators will profit with each step DWA takes north of the $31.26 mark (strike price plus the VWAP) between now and front-month expiration. This denotes a premium of 4.3% to the stock's present perch of $29.98. While the maximum payout is theoretically unlimited, the potential risk is capped at the net debit paid. What's more, the security's Schaeffer's Volatility Index (SVI) of 32% ranks lower than all but 18% of similar readings taken during the past year, suggesting DWA's short-term options are relatively cheap right now.

Also of note, the October 35 call has seen 1,525 contracts change hands at a VWAP of $0.35. Again, the majority of the contracts went off at the ask price, implied volatility has ticked higher, and today's volume has exceeded current open interest levels, signaling the addition of fresh positions here, as well. In this case, however, the call buyers need DWA to muscle north of $35.35 -- territory not explored since November 2010 -- by the close on Oct. 18, in order to secure a profit. The delta for this option sits at 0.16, giving it just over a 1-in-6 chance of arriving in the money.

According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), this campaign for calls over puts is more of the same for DWA. In fact, the equity's 20-day call/put volume ratio stands at 4.50, indicating traders have bought to open more than four calls for every put during the past month. However, it should also be noted that short interest accounts for a hefty 28.4% of the stock's available float, suggesting that some of these call buyers could be short sellers looking to hedge their bets.

DreamWorks Animation SKG, Inc. (NASDAQ:DWA) has enjoyed a banner 2013, gaining nearly 81% year-to-date, and outperforming the broader S&P 500 Index (SPX) by north of 35 percentage points during the past three months. On the charts, the shares continue to trade atop their 10-week moving average, which has acted primarily as support since January.


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