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Are Activision Bulls Betting on a Buyout?

Traders were scooping up ATVI's August 13 calls

by 7/20/2012 10:38 AM
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Despite bucking the broad-market trend higher yesterday, Activision Blizzard, Inc. (NASDAQ:ATVI - 12.22) was popular among the option bulls. During the course of the session, the videogame maker saw roughly 18,000 calls cross the tape -- more than six times its average daily call volume. On the other hand, fewer than 700 ATVI puts traded.

Garnering the most attention was the near-the-money August 13 call, which assumes front-month status after the closing bell today. By the time the dust settled, more than 9,000 of these short-term calls changed hands -- mostly at the ask price, hinting at buyer-driven activity. Furthermore, call open interest at the August 13 strike ballooned by nearly 7,300 contracts overnight, confirming our theory of newly added bullish bets. By purchasing the calls to open, the buyers are hoping ATVI surmounts the $13 level -- a feat not accomplished since mid-November -- within the next few weeks.

Fueling yesterday's affinity for optimistic positions could've been speculation surrounding Vivendi's potential sale of its majority stake in ATVI. Specifically, while Vivendi is still hoping for an outside media or tech company to scoop up the videogame maker, Activision itself may be considering buying out the French company's 60% stake, The Wall Street Journal reported earlier this week, citing sources familiar with the matter. However, in order to finance the deal or secure a partnership with a private equity fund, ATVI would need to raise about $5 billion in debt, according to Reuters.

Amid all of the buyout hopes, ATVI calls have grown increasingly popular, even before yesterday. The stock sports a 10-day call/put volume ratio of 5.85 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), suggesting options traders have bought to open nearly six calls for every put during the past couple of weeks. Plus, this ratio registers in the 65th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets of late.

In the same vein, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.35 suggests calls nearly triple puts among options expiring within three months. Furthermore, this ratio stands higher than just 21% of all others taken during the past year, implying that short-term options traders are much more call-heavy than usual at the moment.

However, peak call open interest in the soon-to-be front-month August series of options stands at the aforementioned 13 strike, with nearly 26,000 contracts in residence. In the near term, this abundance of bullish bets could exacerbate resistance in the $13 region. Meanwhile, the deep out-of-the-money August 15 strike is home to close to 21,000 calls outstanding, likely reflecting investors' hopes for an attractive buyout bid on the horizon.

In similar fashion, ATVI boasts 14 "strong buy" endorsements from the brokerage bunch, compared to five "holds" and not one "sell" rating. Plus, the consensus 12-month price target of $15.70 implies expected upside of 27% to ATVI's closing price of $12.35 on Thursday, and rests in territory not charted since late 2008.

At last check, ATVI has shed 1% to linger in the $12.22 neighborhood.


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