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Option Traders Take Aim at Smith & Wesson

SWHC put options are on fire

by 1/11/2013 10:48 AM
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Option traders have been targeting Smith & Wesson Holding Corporation (NASDAQ:SWHC - 8.43) lately, especially on the put side of the tape. During the past couple of weeks, bearish betting has accelerated to its fastest pace in more than a year, and short-term traders are more put-heavy than usual right now. However, speculators on Thursday employed puts for less "vanilla" reasons, betting on short-term support for the gun maker.

During the course of the session, SWHC saw roughly 17,000 puts change hands -- about five times its average daily put volume, and more than twice the number of SWHC calls exchanged. Most active was the February 8 put, which saw more than 8,150 contracts traded at a volume-weighted average price (VWAP) of $0.47. The majority of the puts crossed at the bid price, and put open interest soared overnight, hinting at sell-to-open activity.

By writing the puts to open, the sellers are expecting SWHC to remain north of familiar support at the $8 level through February options expiration. In this best-case scenario, the puts will remain out of the money, and the sellers can retain the entire premium received from the sale.

As alluded to earlier, though, most option traders have been utilizing puts for more traditional, bearish reasons. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio stands at a 52-week high of 0.79. In other words, option buyers haven't picked up SWHC puts over calls at a faster clip during the past year.

Echoing that, the stock's Schaeffer's put/call open interest ratio (SOIR) sits at its own 12-month high, at 0.83. Or, in simpler terms, short-term options players haven't favored SWHC puts over calls by a wider margin at any other time during the past 52 weeks.

The aforementioned January 8 strike is home to peak put open interest in the front-month series, with more than 10,400 puts in residence. In the short term, this abundance of bearish bets could translate into an options-related foothold for SWHC. Plus, the $8 region has already emerged as a technical floor for SWHC, catching the stock's pullbacks since mid-December.

However, the stock's short-term trajectory will likely be dictated by upcoming events on Capitol Hill. Specifically, in response to the Newtown massacre, Vice President Joe Biden is expected to deliver an aggressive gun-control plan to President Obama on Tuesday. Following a meeting with Biden yesterday, James Baker, director of federal affairs for the National Rifle Association (NRA), said the group is "disappointed with how little this meeting had to do with keeping our children safe and how much it had to do with an agenda to attack the Second Amendment."


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