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Lions Gate Finds an Audience with Longer-Term Bulls

LGF's technical milestone attracts March speculators

by 10/19/2012 9:35 AM
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Lions Gate Entertainment Corp. (USA) (NYSE:LGF - 16.09) tagged a new all-time peak of $16.45 yesterday, after Summit Entertainment -- an LGF subsidiary -- partnered with Jamba Juice Company to debut a "Berry Bitten" smoothie in celebration of the upcoming release of The Twilight Saga: Breaking Dawn -- Part 2. As such, more than 6,800 calls crossed the tape, which was six times the norm. By comparison, fewer than 1,000 puts were exchanged.

A large portion of the action occurred at the March 2013 18 strike, which saw 3,364 calls change hands at a volume-weighted average price (VWAP) of $0.90 each. The majority of these contracts were traded off the ask price, pointing to buyer-driven volume. Meanwhile, open interest at this strike rose by 2,545 contracts overnight, implying that new positions were added. This option now holds peak call open interest of 3,465 contracts. By purchasing these calls to open, speculators are counting on the stock to power north of $18.90 (strike price plus VWAP) by March expiration, which would be a 15% increase over yesterday's new high.

This fondness for calls over puts is nothing new for LGF. In fact, the security sports a 20-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 4.22. Or in simpler terms, calls bought to open have more than quadrupled puts during the past month.

However, although short interest on the film-studio name fell by about 7% during the most recent reporting period, these bearish bets still account for nearly 18% of LGF's available float. This suggests some of the recent buy-to-open call volume could be the work of short sellers looking to hedge their pessimistic positions. Either way, it would take more than 14 days to buy back these shorted shares, at the equity's average daily trading volume.

In terms of analyst coverage, all of the brokerage firms following the stock seem to have high expectations for LGF. All eight have issued "buy" or better ratings, with not a single "hold" or "sell" suggestion in sight. Furthermore, the security's average 12-month price target is docked at $18.33, representing expected upside of more than 13% to Thursday's closing price of $16.17.

LGF has been a technical heavyweight lately, boasting a year-over-year advance of about 126%, as well as a year-to-date gain of more than 94%. The shares have also outpaced the broader S&P 500 Index (SPX) by nearly 14 percentage points during the past 40 sessions. Meanwhile, a look at the charts shows that the stock remains perched well above its 20-day and 32-day moving averages, which have provided double-barreled support since June. Should LGF maintain its positive momentum, yesterday's call players could be applauding a new record high prior to March expiration.


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