Smith & Wesson Holding Corp (SWHC) Bulls Pile On Ahead of Earnings

As the gun control debate rages on, Smith & Wesson Holding Corp (NASDAQ:SWHC) is surging, as the firm prepares to release earnings

Dec 7, 2015 at 11:27 AM
facebook X logo linkedin

In light of the reheated national debate on gun control, firearm manufacturer Smith & Wesson Holding Corp (NASDAQ:SWHC) is getting a lift. The stock is 6.1% higher today at $20.15, and earlier hit an eight-year high of $20.24. Year-to-date, the shares have more than doubled in value, and with earnings looming, some traders are speculating on higher highs in the near future. 

Looking to the options arena, contracts are trading at 15 times the normal rate. Nearly 5,800 calls have crossed -- on pace to set a new annual high for daily call volume -- versus roughly 1,800 puts. Bullish traders appear to be targeting the December 20 call, where buy-to-open activity is likely. The 20 strike is also seeing attention in the January 2016 series. By opening new positions here, traders are betting on SWHC to extend its run to new multi-year highs over the short term. 

This bullish sentiment is nothing new, however. Looking at data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day call/put volume ratio stands at an elevated 9.39. With more than nine calls being bought to open for every put, this ratio tops 78% of all others from the previous 12 months. 

Reinforcing this data is SWHC's Schaeffer's put/call open interest ratio (SOIR). At 0.41, this indicator reveals call open interest more than doubles put open interest among options that expire within the next three months. 

There is a chance some of this interest in calls is attributable to short sellers hedging. Currently, roughly 12% of the equity's float has been sold short. At normal daily volumes, it would take over two weeks for these bears to repurchase their bets. 

Unfortunately, anyone shopping in SWHC's options pits will have to pay a relatively steep price, no matter their intentions. This is evidenced by the security's Schaeffer's Volatility Index (SVI). At 55%, in the 69th annual percentile, this reading points to loftier-than-normal premiums on the equity's near-term options. 

No doubt, these elevated premiums are related to the stock's upcoming earnings release, which is scheduled for after the close on Tuesday. Historically speaking, shareholders are likely hoping for more of the same from the firm. Going back eight quarters, SWHC has only seen two negative post-earnings reactions. In fact, in the session following its last report, the shares surged 11.2%. This time, the options market is pricing in a 9.5% swing, according to Smith & Wesson Holding Corp's (NASDAQ:SWHC) near-term at-the-money straddle data -- right in line with the stock's median move of 9.3%.

Unlock Weekend Profits with Chris Prybal's Favorite Strategy Up +487.5% in 2024

With the markets going left, right, and sideways, you need to have a plan now more than ever. 

Expert Trader Chris Prybal is no stranger to volatility, and has mastered finding big stock rallies while other traders aren't looking over the weekend. Rallies that produced gains like +207% on RTX calls, +236% on MARA calls, and +238% on NET calls.

A few simple moves on Sunday at 7pm could be the “Secret Sauce” your portfolio needs to not just stay afloat, but make unprecedented gains in this turbulent market.

Don’t sit on the sidelines, beat the market with Chris Prybal's strategy. Join him now!