Dreamworks Animation Skg Inc's (DWA) Surge Has Skeptics Kicking Rocks

Strong fourth-quarter earnings have Dreamworks Animation Skg Inc (DWA) soaring higher, and an unwinding of pessimism could translate into more upside

by Kirra Fedyszyn

Published on Feb 24, 2016 at 1:01 PM
Updated on Jun 24, 2020 at 10:16 AM

Last night, Dreamworks Animation Skg Inc (NASDAQ:DWA) reported fourth-quarter earnings and revenue that well-surpassed analyst estimates. As a result, the stock is trading 20.5% higher today, last seen at $25.38, paring its year-to-date loss to 1.5%. However, recent option buyers and short sellers could be kicking rocks. 

Today, DWA options are crossing the tape at five times their typical intraday rate, with calls trading at seven times their average pace, outnumbering puts nearly 2-to-1. Among near-term options -- specifically, those expiring in the next three months -- traders were already at a call-heavy extreme. DWA has a Schaeffer's put/call open interest ratio (SOIR) of 0.38 -- an annual low. 

But that preference for calls doesn't necessarily point to a bullish point of view. At present, 12.5% of the security's available float is wrapped up in short interest -- a volume that would take nine days to cover, at DWA's typical daily pace. It's possible that some of those calls -- especially at out-of-the-money strikes -- were picked up by short sellers hedging their positions against a surprise rally like today's. Underscoring this, peak call open interest in the March series stands at the 26 strike, which was notably out of the money at yesterday's close.

From a broader standpoint, the 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows about 2.5 DWA puts bought to open for each call during the last 10 trading days -- a ratio higher than 84% of comparable readings in the past year. In other words, option buyers have initiated bearish bets over bullish at a rapid-fire rate in the past two weeks.

But if option traders were bracing for a post-earnings fall for the stock, it could be because DWA has moved lower in the session after six of its eight most recent earnings reports. Heading into last night, analysts were also relatively bearish on the stock, with four rating it a "buy" or better, compared to five who call it a "hold" or worse. 

In light of last night's strong results, Macquarie has already raised its price target on DWA to $31 -- a level the shares haven't seen in nearly two years. And odds are good that more brokerages could soon be following suit. An unwinding of bearish sentiment among analysts, option buyers, or short sellers could help propel Dreamworks Animation Skg Inc (NASDAQ:DWA) toward new highs.

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