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Short-Term OmniVision Technologies Traders Target Calls

Some speculators are exploting pre-earnings premiums on OVTI

by 8/30/2012 10:54 AM
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The shares of OmniVision Technologies, Inc. (NASDAQ:OVTI - 15.95) have muscled roughly 34% higher since skimming the $12 level in July, led into the black atop their 10-day moving average. As such, the security's Relative Strength Index (RSI) now sits at a lofty 75 -- in overbought territory, suggesting a pullback could be in the short-term cards. Against this backdrop, it appears some options traders may be exploiting relatively lofty pre-earnings premiums to bet on limited upside for OVTI.

During the course of yesterday's session, traders circled the stock's September 17 call, which saw roughly 1,000 calls cross the tape. The majority of the contracts traded at the bid price, and call open interest edged higher overnight, pointing to sell-to-open volume. By writing the calls to open, the traders are expecting OVTI to remain south of $17 through options expiration. In this best-case scenario, the calls will expire worthless, allowing the speculators to retain the entire premium received from the sale.

And, as alluded to earlier, OVTI's near-term options have become increasingly pricey ahead of tonight's turn in the earnings spotlight -- a draw for option sellers. In fact, as you can see on the chart below, the equity's Schaeffer's Volatility Index (SVI) has powered significantly higher recently, and now sits at 77% -- above roughly half of all other readings of the past year. In other words, implied volatility on OVTI's short-term options is on the rise, which isn't uncommon ahead of a potential volatility catalyst like an earnings report.

Broadening our sentiment scope, we find the options crowd has been employing OVTI calls for more traditional, seemingly bullish reasons. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 50-day call/put volume ratio of 6.01, indicating that traders have bought to open six OVTI calls for every put during the past few months. What's more, this ratio sits just six percentage points from a 12-month peak, suggesting option buyers have initiated optimistic positions at a near annual-high clip.

However, it's worth noting that short interest edged 1.2% higher during the past month, and now accounts for a healthy 20% of OVTI's total available float. At the stock's average daily volume, it would take nearly seven sessions to buy back all of these bearish bets. As such, it's possible that the aforementioned affinity for long calls could be attributable to hedging activity among the shorts.

At last check, OVTI has surrendered 1.4% to hover just shy of $16. According to Thomson Reuters, the firm has matched or exceeded the Street's bottom-line earnings estimates in three of the past four quarters.

Schaeffer's Volatility Index (SVI) for OVTI


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