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Activision Blizzard Bulls Hope for a Near-Term Climb

Some call players may be skeptics in bulls' clothing

by 9/20/2012 9:34 AM
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Call activity has been running hot on Activision Blizzard, Inc. (NASDAQ:ATVI - 11.88) lately, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the stock's 20-day call/put volume ratio sits at 8.76, confirming that traders have bought to open nearly nine calls for every put during the past month. What's more, premium buyers are likely attracted by the equity's Schaeffer's Volatility Index (SVI) of 26%, which ranks higher than just 18% of all other readings gathered over the past year. In other words, short-term options are relatively inexpensive at the moment.

This bullish options trend extended into yesterday's session, as well. Approximately 9,500 calls crossed the tape on Wednesday, reflecting more than four times the equity's average daily volume. Meanwhile, fewer than 100 puts changed hands.

Most popular was the near-the-money October 12 strike, where about 5,000 calls were traded at a volume-weighted average price (VWAP) of $0.29 per contract. The bulk of these calls were exchanged at the ask price, pointing to buyer-fueled activity. With implied volatility 2.1 percentage points higher by the end of the session -- along with the fact that open interest at this strike jumped by 4,285 contracts -- it can be inferred that new positions were established yesterday. By purchasing these calls to open, traders are counting on the stock to muscle north of breakeven at $12.29 (strike price plus VWAP) by the time October options expire.

Further evidence of this penchant for ATVI calls over puts is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.39, indicating that calls nearly triple puts among the front three-months' series of options. This ratio registers in the 32nd percentile of its annual range, reflecting a healthier-than-usual appetite for short-term calls over puts.

Sentiment toward the video-game guru is considerably elevated among the brokerage bunch, as ATVI boasts 16 "strong buy" endorsements, compared to just four "holds" and zero "sell" suggestions. Meanwhile, Thomson Reuters shows an average 12-month price target of $15.64, representing expected upside of roughly 33% to Wednesday's closing price of $11.88.

Is this extreme optimism toward ATVI warranted? Not particularly, from a technical standpoint. The stock currently sits on a year-to-date deficit of 3.6%, and has trailed the broader S&P 500 Index (SPX) by more than eight percentage points during the past three months. The equity has had a choppy ride on the charts lately, and continues to trade below its 200-day moving average -- a trendline that has served as stubborn resistance since mid-May.

Another point to consider is the fact that short interest on the security ramped up by close to 16% during the past month, and now accounts for approximately 4% of ATVI's float. In other words, some of the recent buy-to-open call volume could be the work of skeptics looking to hedge their bets. Either way, time will tell if the stock has the legs to run higher over the next several weeks.

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