Are Smith & Wesson Holding Corp (SWHC) Options Traders Running Scared Ahead of Earnings?

Smith & Wesson Holding Corp (NASDAQ:SWHC) options bears are emerging ahead of earnings

Jun 16, 2016 at 11:22 AM
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Smith & Wesson Holding Corp (NASDAQ:SWHC) options have been in high demand recently, as the gun manufacturer prepares to release its fiscal fourth-quarter earnings report after the close today, and amid an increasingly heated debate on gun control. In fact, some on Wall Street are anticipating a slowdown in the gun industry, while Senate Democrats just held a 15-hour filibuster to address firearms. 

Data shows SWHC options volume running above average levels in each of the past nine days, with put and call open interest both sitting at 12-month highs. While the gun stock's call options have been more popular than puts on an absolute basis recently, that may not tell the whole story about trader sentiment ahead of earnings. 

For instance, more calls have been bought to open than puts during the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). However. SWHC's 10-day put/call volume ratio across these exchanges has increased by almost 400% since the start of the month, with the current ratio of 0.76 outranking 87% of all others from the past year. In other words, traders have been buying to open SWHC puts over calls at a much faster-than-usual clip ahead of earnings.

Similarly, the gun stock's Schaeffer's put/call open interest ratio (SOIR) comes in at 0.57, which sits in the 93rd annual percentile. This tells us that short-term options traders are much less call-skewed than normal. 

Outside the options pits, bearish sentiment has actually been on the decline. Short interest on SWHC dropped by 11.4% over the past two reporting periods -- though these bears still control over 15% of the stock's float. At SWHC's average daily volume, it would take short sellers nine days to cover their positions. 

SWHC has edged higher today to trade at $21.50, attempting to gain a foothold atop its 200-day moving average. However, the stock has fallen more than 29% since it shot to an all-time high of $30.44 in March, with recent breakout attempts cut short by its descending 60-day moving average. 

Historically, Smith & Wesson Holding Corp (NASDAQ:SWHC) has enjoyed positive post-earnings sessions for six straight quarters. Analysts are expecting the company to report per-share earnings of 54 cents on sales of roughly $214.6 million, and the latest data suggests firearm purchases are higher on a year-over-year basis.

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