Short Sellers Could Be Hedging Again on Scientific Games Stock

Long-term calls have been extremely popular on SGMS

Sep 18, 2018 at 1:47 PM
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Scientific Games Corp (NASDAQ:SGMS) hit a 52-week low of $24.35 out of the gate today, but has since reversed course to trade up 5% at $26.15. The shares seem to be gaining on news that director Barry Schwartz bought 5,000 shares. Regardless, options volume is booming, as it appears some traders are betting on a breakout for SGMS stock.

Call volume is accelerated today, and it's in large part due to what appears to be straightforward buying activity at the January 2020 30-strike call. Those opening the calls are betting on long-term upside for SGMS shares, though this could also be the work of short sellers hedging. That's because 16.5% of the float is held by short sellers, which equates to 5.6 times the average daily trading volume.

What's more, call buying has been extremely popular during the past 50 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), with 22 long calls crossing for every long put. And looking at the top open interest positions on Scientific Games, many of them are calls in the January 2019 or 2020 series, the top spot going to the January 2019 70-strike call (though this option could be seeing selling activity today). As such, it appears likely that much of the call activity on the stock has been from short sellers hedging against more unexpected upside.

Either way, short-term options have been priced up quite a bit, evidenced by the stock's 30-day at-the-money implied volatility. This reading has moved up to 75.6%, which is just 1 percentage point from a 12-month high, showing elevated volatility expectations for near-term contracts.

Taking a quick look back at SGMS' chart, the shares have been getting crushed in recent months, losing half their value since trading above $60 in early June. What's more, the 20-day moving average has been a formidable level of resistance.

scientific games stock


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