Smith & Wesson Holding Corp (SWHC) Put Buyers Bet on More Losses Ahead of Debate

Smith & Wesson Holding Corp (SWHC) is sliding on news it did not win a U.S. Army contract

Sep 26, 2016 at 1:07 PM
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While voters in the U.S. prepare for tonight's presidential debate -- where viewership is expected to crush records -- gunmaker Smith & Wesson Holding Corp (NASDAQ:SWHC) is among the stocks that could be affected by the political rhetoric. Today's session has been abysmal for SWHC, however, with the shares sliding 7.8% to $25.41 on news the company failed to a secure a contract with the U.S. Army to produce replacements for standard M9 sidearms. The drop has options traders chiming in, with many betting on extended losses for the stock.

At last check, SWHC puts are crossing the tape at five times the rate typically seen at this point in the day, with nearly 4,300 contracts traded. In fact, put volume is on pace to end the day just 2 percentage points from an annual peak. Most active by far is the November 26 put, where traders have been purchasing new positions, expecting the stock to extend its slide below the strike through the back-month option's expiration, on Friday, Nov. 18. Meanwhile, it looks like bearish speculators may also be buying to open the next most active contracts: the October and November 25 puts.

Call buying has dominated SWHC's options pits in recent weeks, however. The stock's 50-day call/put volume ratio of 3.95 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the stock's calls purchased at nearly four times the rate of puts over the period. Moreover, this ratio sits higher than four-fifth of all readings taken in the past 12 months.

It's an attractive time to buy premium on the equity's short-term options, too. The options market is pricing in unusually low volatility expectations, per SWHC's Schaeffer's Volatility Index (SVI) of 0.32 -- in just the 6th percentile of its annual range. Meanwhile, the stock's Schaeffer's Volatility Scorecard (SVS) of 82 suggests the market has tended to underprice SWHC's ability to make outsized moves over the past year.

Outside of the options pits, SWHC has seen somewhat less optimism of late. For one, the 8.2 million shares of the stock currently sold short represent more than 14% of its available float, or a full week's worth of trading, at average daily volumes. Plus, half of the analysts providing coverage maintain a lukewarm "hold" rating on the shares.

Technically speaking, SWHC has put in a strong performance, adding almost 51% over the past 12 months, and hitting an all-time high at $31.19 in July. With today's drop, however, Smith & Wesson Holding Corp (NASDAQ:SWHC) looks to be testing support at its 10-month moving average -- a trendline that has ushered the shares higher since January 2015.

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