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Deckers Outdoor Calls Are Hot After the Holidays

DECK traders are targeting front-month, round-number calls

by 12/27/2012 11:14 AM
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The shares of Deckers Outdoor Corp (NASDAQ:DECK - 37.39) are flying in the face of broad-market headwinds, and it looks like options traders expect the rally to continue. Already today, the Ugg maker has seen more than 4,500 calls change hands -- representing a 38% mark-up to its average intraday call volume, and more than double the number of DECK puts exchanged.

Digging deeper, the January 2013 40-strike call has emerged as most popular, with more than 1,300 contracts traded. The majority of the calls have crossed at the ask price, and implied volatility was last seen 1.5 percentage points higher, hinting at buy-to-open activity.

By purchasing the calls to open, the buyers are betting on DECK to surmount the $40 level within the next few weeks. More specifically, the calls changed hands at a volume-weighted average price (VWAP) of $1.45, meaning the buyers will profit if DECK topples the $41.45 level (strike plus VWAP) by front-month options expiration. However, even if DECK remains south of the round-number strike, the speculators' maximum risk is capped at the initial net debit.

Today's bullish betting is nothing new for DECK, though, as evidenced by the latest data from the major options exchanges. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security has racked up a 10-day call/put volume ratio of 2.77. What's more, this ratio stands higher than 84% of all other readings of the past year, suggesting option buyers have picked up DECK calls over puts at a much faster-than-usual clip during the past couple of weeks.

In the front-month series, the out-of-the-money 45 strike has grown increasingly popular, with roughly 2,800 calls opened during the past 10 sessions. However, the deeper out-of-the-money January 50 strike remains home to peak call open interest, with around 22,500 contracts outstanding. Against this backdrop, and considering short interest accounts for more than half of DECK's total available float, it's possible that short sellers are hedging their bearish bets with out-of-the-money calls.

At last check, the shorts are undoubtedly getting spooked, with DECK up 7.2% to wink at the $37.39 level. While many retailers are trading lower on signs of relatively weak holiday sales, reports of solid demand for DECK's classic sheepskin boots are helping the footwear concern buck the trend.


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