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Option Brief: Wall Street freshman King Digital Entertainment PLC (NYSE:KING) will step into the earnings confessional for the first time before the open on Wednesday. Ahead of the event, and commencing the expiration of a 40-day post-IPO "quiet period," analysts and options traders are waxing optimistic on the Candy Crush maker.
The three primary underwriters for KING's IPO -- J.P. Morgan Securities, Credit Suisse, and BofA-Merrill Lynch -- all initiated coverage of the stock with a "buy" or better rating overnight. Likewise, Pacific Crest, Cowen, and RBC launched coverage with "outperform" endorsements and price targets of $21, $31, and $24, respectively. As a result, KING is 7.4% higher at $18.86, sparking a run on short-term options -- especially on the call side.
The equity's 30-day at-the-money implied volatility (IV) hit an all-time high earlier in the session, and was last seen 6.1% higher at 76.8%. Meanwhile, call volume is trading at twice the intraday norm, with more than 1,100 contracts exchanged. Most of the action transpired at KING's May 20 call, which many speculators appear to have bought to open for a volume-weighted average price (VWAP) of $0.62 -- making breakeven $20.62 (strike plus VWAP) at the close on Friday, May 16, when front-month options expire.
Further reflecting the growing demand for short-term options is the stock's Schaeffer's Volatility Index (SVI) of 80%, which sits just 2 percentage points from its own all-time acme. In other words, King Digital Entertainment PLC's (NYSE:KING) front-month options are expensive, from a volatility standpoint.