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Is Sentiment Shifting Toward Smith & Wesson?

SWHC option bulls are targeting December 10 calls

by 11/8/2012 11:25 AM
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The shares of Smith & Wesson Holding Corporation (NASDAQ:SWHC - 10.78) are extending their post-election uptrend today, and it looks like more than a few options traders are gambling on even more upside for the gun maker. So far, SWHC has seen roughly 2,200 calls cross the tape -- nearly quadrupling its average intraday call volume, and about six times the number of SWHC puts exchanged.

Garnering the most attention has been the now in-the-money December 10 call, which has seen close to 900 contracts change hands. Eighty-nine percent of the calls have traded at the ask price, and implied volatility on the back-month strike was last seen 1.6 percentage points higher, hinting at buy-to-open action.

By purchasing the calls to open, the buyers are expecting SWHC to continue its journey into double-digit territory. More specifically, the volume-weighted average price (VWAP) of the calls is $1.32, meaning the buyers won't break even unless SWHC topples the $11.32 level (strike plus average premium paid) within the next few weeks. However, even if SWHC remains stagnant through expiration, the buyers' maximum risk is capped at the initial premium paid for the calls.

From a sentiment standpoint, today's appetite for bullish bets -- especially of the short-term variety -- marks a change of pace for SWHC. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.29 stands just six percentage points from a 12-month peak, implying that near-term options speculators have rarely been more put-biased during the past year.

Meanwhile, despite depleting by 8.5% during the most recent reporting period, short interest accounts for a healthy 12.6% of SWHC's total available float. At the security's average pace of trading, it would take nearly a week to repurchase all of these pessimistic positions. A short-squeeze situation in the wake of SWHC's ascent could be adding fuel to the equity's fire.

At last check, SWHC has added 4% to flirt with the $10.78 level. The stock is on pace to end a second straight session north of its 10-day and 20-day moving averages -- a feat not accomplished in more than a month.


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