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