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Will Earnings Send Activision Blizzard, Inc. (ATVI) to New Highs?

Call volume swells in ATVI with earnings due on Wednesday

by 5/6/2013 1:43 PM
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Bullish option traders have rushed toward Activision Blizzard, Inc. (NASDAQ:ATVI) today, suggesting optimism ahead of the video game maker's earnings report later this week. Call volume is approximately 12 times greater than usual today, at 20,000 contracts. What's more, call trading is outpacing put trading by a factor of 16.

Capturing the lion's share of the attention is the June 16 call, which has seen almost 15,000 calls trade on open interest of fewer than 2,400. Nearly all of these options have changed hands at the ask price, and implied volatility is on the rise, suggesting these out-of-the-money positions are being purchased to open for a volume-weighted average price (VWAP) of $0.30.

When these options expire on June 21, today's call buyers will be profitable if ATVI is trading above $16.30 (strike price plus the VWAP). Although ATVI hit a new 52-week high of $15.33 earlier today (and is now off 1.4% at $14.97), the last time the stock was trading atop $16.30 was in early September 2008. Delta for the option currently sits at 0.30, suggesting a less than1-in-3 chance the calls will be in the money by the time expiration rolls around. This delta measure also means the calls will appreciate by $0.30 for every $1 advance in the underlying stock (and lose $0.30 for every $1 that ATVI drops).

As noted, ATVI is set to report earnings after the close on Wednesday. The consensus estimate for per-share earnings is 11 cents, which is a 5-cent improvement over the previous year's results. Activision Blizzard has managed to exceed the average estimate in the past eight quarters, but its post-earnings price action hasn't been notable. Specifically, the shares have dropped an average of 0.4% and 2%, respectively, in the day and week following earnings.

This lack of post-earnings fanfare could be one reason why today's option traders opted for calls in the back-month series, giving the stock seven weeks to muscle up to the breakeven point. If ATVI is still trading below the 16 strike at expiration, however, the call buyers are only on the hook for the premium paid.


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