Call Players Pounce as American Outdoor Stock Retreats

The stock is lower today following weekend gun control protests

Mar 26, 2018 at 3:22 PM
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Shares of American Outdoor Brands Corp (NASDAQ:AOBC), formerly known as Smith & Wesson, are trading down 4.3% at $9.42 following a bankruptcy filing by gun maker Remington and Saturday's March for Our Lives protests for gun control. AOBC options traders are targeting a quick bounce, with call volume running at three times what's typically seen at this point in the day.

By the numbers, 6,492 calls and 2,697 puts have changed hands today, with total options volume pacing in the 98th annual percentile. The weekly 4/6 10-strike call is most active, and it looks like new positions are being purchased here for a volume-weighted average price (VWAP) of $0.41. At expiration, breakeven for these call buyers is $10.41 (strike plus VWAP) -- roughly 10.5% above AOBC's current price.

While some of this activity could be at the hands of options bulls betting on a rebound -- the gun stock is down 26.6% year-to-date, and its 14-day Relative Strength Index (RSI) is teetering near oversold territory, last seen at 33.3 -- it's also possible that AOBC short sellers may be purchasing the out-of-the-money calls to hedge against any unexpected upside. Short interest is up almost 15% from mid-December to 7.73 million shares, representing roughly 14.5% of the equity's float.

Whatever the motive, these weekly 4/6 options are pricing in inflated volatility expectations relative to the standard monthly April series. Specifically, at-the-money implied volatility for the weekly 4/6 strike has surged 20 percentage points today to 70.57%, while volatilities for the front-month series are hovering around 58%.

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