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RadioShack Rebound Spurs Bulls Into Action

RSH has seen a relatively rare spike in call volume

by 10/9/2012 11:51 AM
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Call traders are targeting RadioShack Corporation (NYSE:RSH - 2.27) today, with investors gambling on an extended rebound for the beleaguered electronics retailer. At last check, RSH had already seen nearly 2,600 calls cross the tape -- more than five times its average intraday call volume, and more than twice the number of RSH puts exchanged.

Garnering notable attention has been the out-of-the-money April 2.50 call, which has seen 500 contracts traded on open interest of fewer than 150 contracts, pointing to an influx of new initiations. What's more, all of the long-term calls changed hands at the ask price, suggesting they were bought.

By purchasing the calls to open, the buyers are betting on RSH to retake the $2.50 level within the next few months. More specifically, the calls traded at a volume-weighted average price (VWAP) of $0.51, meaning the buyers will profit if RSH topples the $3.01 level (strike plus VWAP) -- a feat accomplished just once on a daily closing basis since mid-August -- by April expiration.

However, today's appetite for bullish bets stands in stark contrast to the growing trend seen on the major exchanges. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), investors have bought to open more than two RSH puts for every call during the past couple of weeks, as evidenced by the equity's 10-day put/call volume ratio of 2.38.

In the same vein, the stock's Schaeffer's put/call open interest ratio (SOIR) stands at 1.88, indicating that short-term puts nearly double their call counterparts. What's more, this ratio sits just four percentage points from a 12-month peak, suggesting near-term options speculators have rarely been more put-heavy during the past year.

Likewise, short interest edged 1.3% higher during the most recent reporting period, and now accounts for a whopping 42.3% of RSH's total available float. In fact, at the stock's average daily trading volume, it would take nearly 17 sessions to buy back all of these bearish bets.

Elsewhere on Wall Street, the brokerage bunch is decidedly skeptical of RSH, which sports 14 "holds" and six "sell" or worse ratings, with not a "buy" in sight. However, that sentiment tide could be shifting, with BofA-Merrill Lynch upgrading the security to "buy" from "underperform" this morning. Plus, the analysts lifted their price target by 25% to $2.50, citing the company's liquidity of more than $1 billion and the potential for a short-squeeze situation.

Against this backdrop, RSH has skyrocketed more than 9.1% to trade near $2.27. The shares are now on pace to end atop their 10-day moving average for the first session since Sept. 24. However, the security is still staring up at its 10-week moving average, which has descended into the $2.65 region. This trendline has ushered RSH roughly 75% lower in 2012, and could limit the equity's upward momentum.

Weekly Chart of RSH since November 2011 With 10-Week Moving Average

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