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How Lions Gate Entertainment Corp. (USA) (LGF) Traders Got Burned

Put sellers are hurting after Lions Gate Entertainment Corp.'s (USA) earnings release

by 5/30/2014 10:14 AM
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Lions Gate Entertainment Corp. (USA) (NYSE:LGF) option traders came out in force yesterday. Put volume, which ran at 14 times the average daily pace, slightly edged out call volume -- 14,000 contracts to 13,000. The increased activity came ahead of LGF's fiscal fourth-quarter earnings report, which was released last night.

Most active was LGF's June 28 put, where close to 8,000 contracts crossed the tape. Nearly 7,300 translated as open interest overnight, hinting at the creation of new positions. However, the majority of the contracts traded at the bid price, suggesting they were sold to open, as speculators wagered on a short-term floor for the shares. Lions Gate closed at $29.53 on Thursday.

The put writers' goal was for LGF to maintain its foothold north of $28 through the close on Friday, June 20, when the front-month options expire. If that happened, the contracts would expire worthless, and the sellers would retain the initial premium collected as their maximum potential reward. Based on Thursday's volume-weighted average price (VWAP), that amounts to $0.63 per contract, or $63 (since each contract is based on 100 shares of stock).

However, things aren't looking good for yesterday's put writers. Last night, the company reported quarterly net income of $49.2 million -- down 70% on a year-over-year basis -- and weaker-than-expected revenue of $721.9 million. Consequently, the shares are down 11.5% at $26.15, bringing the contracts into the money. The June 28 put was recently asked at $2.15 -- which means Thursday's traders would be out $1.52 per contract (ask price less VWAP), or $152, if they bought to close their options right now. Plus, as expiration draws closer, they're also at risk of assignment.

Taking a step back, Thursday's penchant for put selling echoed a longer-term trend in the equity. During the last 50 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Lions Gate Entertainment Corp. (USA) (NYSE:LGF) has seen 10,819 puts sold to open, versus 9,404 bought to open.

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