Option traders are betting on a continued slump for casino concern Bally Technologies Inc. (BYI: sentiment, chart, options) , despite an upbeat analyst endorsement over the weekend.
As noted in Barron's, New York Governor David Paterson awarded a 30-year contract to operate video-lottery terminals at New York City's Aqueduct racetrack to Aqueduct Entertainment Group. Under the deal, Bally has the right to install half of the 4,500 machines – which Roth Capital Partners estimates will contribute about $9 million to the company's incremental annual recurring revenue.
Plus, the analysts opined that the selloff in BYI shares following the company's second-quarter earnings report "creates an attractive entry point" for potential buyers, with the stock now trading for "only 14 times and 11 times [Roth's] calendar-year 2010 and CY11 EPS estimates," respectively. As such, the brokerage firm reiterated its "buy" rating and $58 price target on BYI.
Nevertheless, it appears put traders today aren't buying into the hype. In afternoon activity, BYI has already seen roughly 1,800 puts change hands – more than five times its expected single-session volume of fewer than 350 puts.
The out-of-the-money March 35 put has attracted the most attention, with 355 contracts exchanged – 86% of which have traded at the ask price, suggesting they were likely bought. Plus, the back-month option's implied volatility has advanced about 1.2% so far today, indicating that demand for the put is escalating.
However, digging deeper into BYI's sentiment backdrop suggests that today's preference for puts runs counter to the norm. During the past two weeks, speculators on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have bought to open almost 12 times more BYI calls than puts, as indicated by the stock's 10-day call/put volume ratio of 11.80, in the 88th annual percentile. In other words, traders on the exchanges have initiated bullish bets over bearish at a much faster pace than usual lately.
On that same note, the equity's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.42, implying that calls more than double puts among options slated to expire within three months. What's more, this reading stands only seven percentage points shy of an annual optimistic acme, suggesting that short-term speculators have been more bullishly biased toward BYI only 7% of the time during the past 12 months.
Technically speaking, after disappointing the Street with its quarterly earnings report in late January, the shares of BYI took a tumble. In fact, the stock breached support at its 10-week and 20-week moving averages for the first time since late March 2009, extending its year-to-date deficit to more than 8%.
From a longer-term perspective, however, the equity is attempting to find a foothold at its 10-month trendline, which has ascended into the $37 neighborhood. This moving average guided BYI into the red during the latter half of 2008 into early 2009, and a breach of this trendline could spell trouble for the shares.
Nevertheless, despite BYI underperforming the broader S&P 500 Index (SPX) by 12% during the past 60 sessions, most analysts – like option traders – remain devoted to the bullpen. According to Zacks, the security has earned a whopping eight "strong buys" and one "buy" rating, compared to four tepid "holds" and not a "sell" in sight.
In that same vein, Thomson Reuters pegs the consensus 12-month price target on the security at $53 – more than 8 points above the stock's 52-week high of $46.74, and representing about a 40% premium to BYI's current share price.
From a contrarian perspective, the widespread optimism surrounding the stock, juxtaposed with BYI's less-than-impressive price action of late, could point to additional selling pressure on the horizon. Should the security extend its year-to-date deficit, the bulls could get spooked. An unwinding of optimism among option traders, or a round of downgrades and/or price-target reductions, could exacerbate BYI's recent trip into the red.
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