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Option Idea of the Week: Activision Blizzard

Are new lows in store for struggling ATVI?

by 12/21/2012 11:03 AM
Stocks quoted in this article:

It's been a rough week for videogame makers, thanks to an industry bankruptcy and scrutiny in the wake of the Newtown, Conn., tragedy. However, despite recent challenges both on and off the charts, at least one stock remains beloved on Wall Street: Call of Duty maker Activision Blizzard, Inc. (NASDAQ:ATVI - 10.58). Should the bullish holdouts abandon ship, ATVI could present an opportunity for contrarian bears.

Technically speaking, ATVI has shed roughly 7.3% so far this week, and stands just a hair's breadth from annual-low territory. From a longer-term standpoint, the stock has surrendered roughly 18.7% since skimming the $13 level in mid-May, ushered lower beneath its 10-week and 32-week moving averages.

Weekly Chart of ATVI since April 2012 with 10-Week and 32-Week Moving Averages

From a sentiment standpoint, optimism prevails. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), investors have purchased nearly 11 calls for every put during the past two weeks. In fact, the stock's 10-day call/put volume ratio of 10.63 ranks in the 75th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets of late.

As a result, the equity sports a Schaeffer's put/call open interest ratio (SOIR) of 0.48, indicating that calls more than double puts among options with a shelf-life of three months or less. In the soon-to-be front-month January series of options, the out-of-the-money 11 and 12.50 strikes are most popular, boasting roughly 10,250 and 47,250 calls outstanding, respectively. In the short term, this abundance of bullish bets overhead could translate into an options-related speed bump for ATVI, should the stock attempt a rebound.

Meanwhile, 15 of the 19 analysts following ATVI deem it worthy of a "strong buy" endorsement, with not a single "sell" or worse suggestion to be found. Likewise, the consensus 12-month price target stands at $14.81 -- representing expected upside of about 40% to the stock's current price, and in a neighborhood not charted since October 2008. A continuation of the security's struggles could prompt a wave of downgrades and/or price-target cuts, exacerbating selling pressure on ATVI.

Investors expecting more downside for ATVI should consider buying the stock's in-the-money May 14 puts, which were last asked at $3.70.


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