Lions Gate Entertainment Corp. (LGF) Surge Has Options Pits Exploding

Lions Gate Entertainment Corp. (USA) (LGF) options activity is at six times normal levels


Published on Feb 11, 2015 at 12:53 PM
Updated on Apr 20, 2015 at 5:32 PM

Lions Gate Entertainment Corp. (NYSE:LGF) gapped higher today, last seen up 9.3% at $32.44, on news of a stock swap with the largest voting shareholder of Starz (NASDAQ:STRZ), John Malone, and his affiliates. Malone will also join LGF's board of directors once the deal is completed. In response, activity has picked up in the stock's options pits, with volume running at six times normal intraday levels. Plus, its 30-day at-the-money implied volatility has jumped 5% to 33%, showing increased demand for short-term options.

In fact, LGF's five most active options expire this month, with the February 31 put leading the way. A closer look shows mainly buy-to-open activity here, meaning these traders expect today's rally to be short-lived -- and for the equity to fall below $31 by the close on Friday, Feb. 20, when front-month options expire. Others are more hopeful of the stock, and appear to be buying to open the February 33 call.

Looking back, calls have been the options of choice among LGF speculators. The security's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 5.22 sits only 1 percentage point from an annual high. Some of this activity, however, is likely due to bearish traders looking for a hedge against any upward movement. Over 17% of the stock's float is sold short, representing over three weeks' worth of pent-up buying demand, at normal daily trading levels.

On the street, analysts are fully behind the media company. All nine covering brokerage firms rate the stock a "buy" or better.

Lions Gate Entertainment Corp. (NYSE:LGF) has been a technical laggard of late. Since hitting an annual high of $35.75 in early December, the shares have dropped 9.3%.

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