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Barnes & Noble, Inc. (BKS) Swoon Doesn't Spook Option Bulls

BKS call options are hot, despite the stock's dip

by 6/13/2013 11:27 AM
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Book behemoth Barnes & Noble, Inc. (NYSE:BKS) has emerged as one of the worst performers on the Big Board this morning, surrendering 6.9% to hover just shy of $20. As such, the stock is in danger of finishing the week south of its 10-week moving average for the first time in more than three months. Nevertheless, options traders are keeping the faith, with calls trading at three times the normal pace.

Specifically, BKS has seen roughly 6,900 calls cross the tape, compared to its average midday volume of just over 1,800 calls. Most of the action has transpired at the out-of-the-money June 22 call, where 1,635 contracts have traded at a volume-weighted average price (VWAP) of $0.37. The majority of calls changed hands on the ask side, and implied volatility was last seen 7.7 percentage points higher, hinting at newly bought bullish bets.

In order to reap a reward, the call buyers need Barnes & Noble shares to muscle back atop the $22.37 level (strike price plus VWAP) by June 21, when front-month options expire. From current levels, it would take an ascent of about 12.8% in order for BKS to touch breakeven. Risk, on the other hand, is capped at the initial premium paid for the calls, should the stock remain south of the strike.

From a sentiment standpoint, today's bullish betting marks a change of pace for BKS. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.54 ranks in the 67th percentile of its annual range, pointing to a healthier-than-usual appetite for bearish bets of late.

Meanwhile, short interest accounts for 20.3% of the stock's total float, representing nearly seven sessions' worth of pent-up buying demand, at BKS' average daily volume. Likewise, not one of the three analysts following the security considers it a "buy" or better.

Prior to today's slide, BKS was on fire on the charts, outperforming the broader S&P 500 Index (SPX) by nearly 23 percentage points during the past three months. Should the equity find support at the aforementioned 10-week trendline, or should Barnes & Noble report stronger-than-expected earnings later this month, an exodus of bears could translate into contrarian gas in the tank.


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