Sturm, Ruger & Company (RGR) Rewards Last-Minute Option Bulls

Sturm, Ruger & Company (NYSE:RGR) is higher after Smith & Wesson Holding Corp (NASDAQ:SWHC) reported strong earnings

Jun 17, 2016 at 10:53 AM
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Gun stock Sturm, Ruger & Company (NYSE:RGR) is 3.2% higher at $61.35, following well-received earnings from Smith & Wesson Holding Corp (NASDAQ:SWHC). While the gains have the stock back in positive year-to-date territory, it is now staring up at the overhead $63 level and its 160-day moving average -- which swiftly rejected RGR just days ago. In the options pits, meanwhile, it looks like some last-minute traders may be cashing in on well-timed bullish bets.

Specifically, RGR calls traded at twice their typical volume on Thursday, with a large portion of the action occurring at the stock's June 62.50 call. Traders buying to open this call were betting the shares would break out before tonight's close, when front-month options expire. Based on the call's volume-weighted average price (VWAP) of $0.12, buyers needed RGR to top breakeven at $62.62 (strike plus VWAP) to profit.

With the stock tagging an intraday high of $62.99 earlier, it looks as if a number of option bulls sold to close their winning positions ahead of tonight's expiration. In fact, RGR's June 62.50 call is the most active option again today, with the majority of the action happening on the bid side.

More broadly speaking, this appetite for RGR calls is nothing new. The stock's 50-day call/put volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 3.07, higher than 96% of the past year's readings. Plus, RGR call open interest is docked at an annual peak.

But that doesn't necessarily mean all of the traders are in RGR's bullish corner. With more than 10% of the stock's available float sold short -- or 12 sessions' worth of trading, at RGR's average daily pace -- it's possible some recent call buyers are short sellers looking to hedge their bearish bets against any upside risk. This explanation seems even more likely when considering how little Sturm, Ruger & Company (NYSE:RGR) has done to reward shareholders lately, off more than 21% from its March 18 two-year high of $78.09.

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