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Option Idea of the Week: DreamWorks Animation SKG, Inc. (DWA)

Bears are undaunted by DWA's technical prowess

by 5/31/2013 10:06 AM
Stocks quoted in this article:

DreamWorks Animation SKG, Inc. (NASDAQ:DWA) has made an impressive run up the charts in 2013, boasting a year-to-date gain of about 33%, and outpacing the broader S&P 500 Index (SPX) by more than 20 percentage points during the past three months. What's more, the stock gapped notably higher at the beginning of the month after topping analysts' first-quarter earnings projections, and went on to tag a year-to-date high of $22.26 on May 14. Meanwhile, the shares continue to trade above support at their 10-week moving average -- a trendline breached only twice on a weekly closing basis since mid-January. Despite these technical chops, there is a bounty of skepticism levied against DWA, which could end up strengthening the equity's upward trajectory.

Weekly Chart of DWA since December 2012 With 10-Week Moving Average

Exploring the animation giant's sentiment backdrop, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have been pessimistically skewed toward DreamWorks Animation SKG, Inc. in recent weeks. In fact, the security's 20-day put/call volume ratio checks in at 1.09. In other words, puts bought to open have outstripped calls during the past month.

Similarly, Schaeffer's put/call open interest ratio (SOIR) for DWA checks in at 1.63, with puts easily outstripping calls among options due to expire within the next three months. This ratio ranks higher than 95% of comparable readings taken during the last 12 months, confirming short-term traders have been more put-heavy toward the stock just 5% of the time over the past year. This bevy of bearish positions -- particularly within the June series of options -- could end up serving as options-related support down the road.

This lack of confidence toward the stock extends beyond the options crowd, as well. Short interest on DWA currently accounts for a formidable 30% of the equity's available float, with roughly 19.6 million shares sold short. It would take more than 16 sessions to unwind these pessimistic plays, at the security's average daily trading volume. This points to a significant amount of sideline cash, which could amplify the shares' northbound momentum in the near term.

Also of note, only two brokerage firms have bestowed a "strong buy" endorsement upon DWA, compared to five middling "holds" and three "sell" or worse suggestions. Furthermore, the security's average 12-month price target of $20.36 denotes a discount to the stock's present price of $22.08. From a contrarian standpoint, this leaves the door wide open for future upgrades and/or price-target hikes, which could help boost the equity even higher.

Options players wishing to wager on extended gains for DreamWorks Animation SKG Inc. may want to think about purchasing the stock's in-the-money September 15-strike calls, which are currently priced at $7.30. It should be noted that the company is tentatively scheduled to reveal quarterly earnings during the week of July 29.


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