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Option Brief: Since going public in late March, King Digital Entertainment PLC (NYSE:KING) has been on a roller-coaster ride -- trading as high as $21.39 on its first day on the Big Board, only to plunge to a post-IPO low of $15.26 in mid-May. The volatility is continuing in today's session, with the stock up more than 4% at last check to trade at $17.85. This move to the upside is not going unnoticed by option traders, with nearly 5,000 calls on the tape -- more than nine times the intraday average -- compared to fewer than 900 puts.
Nearly all of the day's call volume has centered on the November 22 strike, where 83% of the 4,018 contracts traded did so on the ask side. Implied volatility has shot 5.5 percentage points higher, and only 53 positions currently make up open interest here. Summing it all up, it seems safe to assume that new positions are being purchased -- a theory echoed by data from the International Securities Exchange (ISE) and Trade-Alert.
These deep out-of-the-money calls are being purchased for a volume-weighted average price (VWAP) of $1.21, making at-expiration breakeven $23.21 (strike plus the VWAP). Gains are theoretically unlimited with each additional move higher, while risk is limited to the initial cash outlay, should KING settle south of the strike price at expiration. Considering the stock has not seen the north side of $22 in its short lifetime, delta on the call is docked at 0.34, suggesting a roughly 1-in-3 chance of an in-the-money finish at the close on Friday, Nov. 21, which is when the options expire.
While it is possible that today's action is a result of "vanilla" option bulls betting on a big run higher for King Digital Entertainment PLC (NYSE:KING), another possible explanation could be that short sellers are hedging against a significant pop. In fact, short interest surged 49.3% over the last two reporting periods, and now accounts for 13.6% of the stock's float.