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Activision Blizzard Bulls Eye Longer-Term Gains

Speculators hone in on ATVI's May-dated calls

by 12/19/2012 2:15 PM
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Activision Blizzard, Inc. (NASDAQ:ATVI - 10.84) has seen a recent influx of call activity, according to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Traders on these exchanges have bought to open 641 calls for every 100 puts during the last two weeks. This 10-day call/put volume ratio of 6.41 is docked in the 55th annual percentile, reflecting a slightly healthier-than-usual appetite for calls over puts.

This bullish trend has carried over into today's session, as well. Roughly 20,000 calls have crossed the tape so far, which is almost nine times the security's expected intraday call volume. By contrast, about 2,300 puts have been exchanged. The May 12 call has received the most attention, with nearly 10,400 contracts trading at a volume-weighted average price (VWAP) of $0.36. Almost all of these calls changed hands at the ask price, suggesting they were bought.

Because this option is currently home to peak call open interest of just 2,014 contracts -- coupled with the fact that implied volatility has edged 1.2 percentage points higher today -- it's likely that new bullish bets are being established here. Essentially, these traders are counting on ATVI to rise north of $12.36 (strike price plus VWAP) by May expiration. In other words, the shares will need to tack on an additional 14% over the next five months. Still, should the security fall short of this goal, the most these speculators stand to lose is the initial premium paid.

It's also worth noting that some of the aforementioned buy-to-open call volume could be attributable to short sellers looking to hedge their bearish positions, as short interest on ATVI soared by more than 45% during the last two reporting periods. These pessimistic bets now account for about 5% of the video game giant's available float.

Meanwhile, sentiment among the brokerage bunch mirrors that of the options crowd, despite ATVI's year-to-date decline of nearly 12%. In fact, the security boasts 15 "strong buy" endorsements, compared to just four tepid "holds" and zero "sell" recommendations. Even more telling, the stock's average 12-month price target of $14.81 represents expected upside of more than 33% to yesterday's closing price of $11.11.

Digging deeper into ATVI's technical stats, the stock has trailed the broader S&P 500 Index (SPX) by more than seven percentage points during the past three months. It also looks as though today's 2.5% drop puts the security on pace to close a third consecutive session below its 40-day moving average, which had previously acted as support since mid-November.


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