Options Intelligence Report: Smith & Wesson Holding Corp. (SWHC) & U.S. Natural Gas Fund LP (UNG)

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Smith & Wesson Volatility Slingers Ride Onto Options Scene

SWHC ñ Smith & Wesson Holding Corp.
Firearms and ammunition manufacturer Smith & Wesson hasnít had a real nice time of it lately with shares missing out largely on the broader rally. Are guns the first thing to go in a recessionary environment? We doubt it ñ not during days of heightened terror alerts and an increasing number of personal background checks. Those are a prerequisite for buying a gun, legally at least.

The attempted share price rally to $6.98 ran out of ammo in July yielding to a persistent assault on breaking ground below $3.87 during December. But it wasnít to be and a 6.7% jump today has lifted it back to $4.50. We believe weíre seeing a couple of options strategies in play. Outright call buying is evident in the February contract at the $5.0 strike where a 25 cent premium has changed hands on around 1,100 call options granting rights to buy the stock 11% higher than it stands today. Only 345 contracts were held by investors before today.

Another strategy appears in the July contract where the $5.0 straddle appears to be in play with investors selling to reap the $1.60 premium thanks to a still lofty 72% reading for implied volatility. The strategy is optimized at expiration in six months in the event that the share price idles at the $5.00 strike price, but the investor makes money so long as shares remain range bound within $3.40 and $6.60. The latter would see spirits lifted back towards the July 2009 peak.

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UNG -  U.S. Natural Gas Fund LP
The good news is that as cold as it is today, one investor seems prepared to discount the uncomfortable conditions and is expecting a return to normal temperatures. The bad news is that you can expect a return to normal by July according to an option combination apparent at that expiration.

It appears that an investor took advantage of the extended freeze around the world to make a contrarian play in the natural gas fund by selling around 1,000 call options at the July $13 strike for 75 cents in order to get long the same expiration $10 strike puts for $1.11 each.

The fund surged again today in line with a jump in energy prices. Heating oil remains the exception but crude oil is up at $82.65 while the price of natural gas is almost 6% higher at $5.97 per btu. The UNG fund, which mirrors the performance of the price of natural gas is 4.7% higher at $10.80. It hasnít traded above $12.22 since August 2009.  The fund bottomed out on December 3 at $8.50, which is likely the fear embedded in this investorís mind as he targets cheaper downside protection.

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Note: The material presented in this commentary is provided forinformational purposes only and is based upon information that isconsidered to be reliable. However, neither Interactive Brokers LLC norits affiliates warrant its completeness, accuracy or adequacy and itshould not be relied upon as such. Neither IB nor its affiliates areresponsible for any errors or omissions or for results obtained fromthe use of this information. Past performance is not necessarilyindicative of future results.

This material is not intended as an offer or solicitation for thepurchase or sale of any security or other financial instrument.Securities or other financial instruments mentioned in this materialare not suitable for all investors. Any opinions expressed herein aregiven in good faith, are subject to change without notice, and are onlycorrect as of the stated date of their issue. The information containedherein does not constitute advice on the tax consequences of making anyparticular investment decision. This material does not take intoaccount your particular investment objectives, financial situations orneeds and is not intended as a recommendation to you of any particularsecurities, financial instruments or strategies. Before investing, youshould consider whether it is suitable for your particularcircumstances and, as necessary, seek professional advice.
 

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