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Deckers Outdoor Pullback Doesn't Spook Option Bulls

Are DECK shorts hedging with calls?

by 1/9/2013 1:22 PM
Stocks quoted in this article:

The shares of Deckers Outdoor Corp (NASDAQ:DECK - 35.96) are bucking the broad-market trend higher this afternoon, extending yesterday's downgrade-induced slide. Nevertheless, DECK calls are flying off the shelves today, with traders either gambling on a rebound or protecting their short positions.

In early afternoon trading, DECK has seen roughly 12,000 calls change hands -- about three times its average intraday call volume, and nearly twice the number of puts exchanged. Most active are the January 2013 37.50-strike call and the March 40 call, which have seen around 3,300 and 2,500 contracts traded, respectively. Most of the calls have crossed at the ask price, and implied volatility was last seen higher at both strikes, hinting at newly bought bullish bets.

The front-month calls traded at a volume-weighted average price (VWAP) of $1.38, meaning the buyers will reap a reward if DECK reclaims the $38.38 level (strike plus VWAP) by the closing bell next Friday, Jan. 18. Meanwhile, the VWAP of the March 40 calls is $2.62, indicating a breakeven level of $42.62 for the buyers. However, even if DECK extends its recent dip, the maximum risk is limited to the premium paid at initiation.

Expanding our sentiment scope, we find that today's preference for long calls is nothing new for DECK. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio is 2.26 -- in the 73rd percentile of its annual range. Or, in simpler terms, option players have bought to open DECK calls over puts at a faster-than-usual pace during the past couple of weeks.

As alluded to earlier, though, some of this call buying -- especially the out-of-the-money variety -- could be attributable to hedging activity among the shorts. Short interest jumped 9.9% during the most recent reporting period, and now accounts for more than half of DECK's total available float. In fact, at the equity's average daily trading volume, it would take more than six sessions to repurchase all of these pessimistic positions.

At last check, DECK has surrendered 4% to hover in the $35.96 neighborhood, bringing its weekly deficit to about 9.8%. From a longer-term perspective, the equity is clinging to support atop its 10-week moving average, which ushered DECK significantly lower through most of 2012.


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