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As Smith & Wesson Holding Corporation (NASDAQ:SWHC) prepared to report quarterly earnings after yesterday's close, speculators were feeling particularly bullish toward the gun maker. Approximately 13,000 calls crossed the tape during the course of Tuesday's session, which was about five times the norm. Conversely, fewer than 2,750 puts changed hands. A large portion of these traders were eyeing the $11 mark, which hasn't been surmounted by the equity since December.
Jumping right in, close to 5,600 contracts traded at the July 11 call for a volume-weighted average price (VWAP) of $0.15. The majority of these out-of-the-money calls were exchanged at the ask price, implying they were bought. Meanwhile, open at this strike jumped by 3,565 contracts overnight, confirming the initiation of fresh optimistic bets. By purchasing the calls to open, traders are counting on SWHC to power north of $11.15 (strike price plus the VWAP) by front-month expiration. This reflects an increase of about 14.9% from the stock's present perch at $9.70.
However, even if the equity remains south of the $11 level, the call buyers shouldn't lose too much sleep over it, considering the most they stand to lose is the initial premium paid for their long positions. What's more, SWHC's Schaeffer's Volatility Index (SVI) of 46% ranks lower than all but 21% of similar annual readings. In other words, the stock's front-month options are relatively cheap right now.
This campaign for calls over puts is business as usual for the security. In fact, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) reveals a 20-day call/put volume ratio of 4.21 for SWHC. Or, in simpler terms, traders have bought to open more than four calls for every put during the past month.
From a technical perspective, Smith & Wesson Holding Corporation (NASDAQ:SWHC) has advanced about 15% year-to-date, and roughly 43% on a year-over-year basis. However, this is a decrease from yesterday, as the stock is currently off about 2.9% today, despite last night's strong turn in the earnings confessional. The firm said fiscal fourth-quarter earnings more than doubled due to strong demand, while revenue boasted double-digit revenue growth and higher margins.