Call-Buying in Downgraded Activision Blizzard

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Shares of Activision Blizzard (ATVI) were down nearly 3%, or 33 cents, to $11.06 during midday trading following a morning downgrade, but at least one investor is taking the opportunity to take a bullish stance on the game manufacturer by buying calls.

Ahead of the opening bell this morning, Piper Jaffray downgraded ATVI to "neutral" from "overweight" and lowered its target price to $135 from $180. ATVI shares continue to drop due to the downgrade, and the company is scheduled to announce earnings figures on Nov. 5 after the market closes (analysts expect the company to report 4 cents per share). ATVI experienced several corporate action events in 2008, including an acquisition of Vivendi, but the company has not announced significant news recently.

The near-the-money January 2010 11-strike calls have changed hands 7,600 times so far today and are home to current open interest of 1,659 contracts. These calls are down 15 cents so far on the day to around 90 cents. This computes to an implied volatility of 42. Shortly after 11:30 a.m. EST, we saw several blocks of these options trade, which totaled 7,000 contracts. These calls traded at 85 cents per contract, and the stock was trading at $10.97 per share at that time.

Bullish investors who bought these calls and decide to hold them until January 2010 expiration will make money if ATVI shares expire higher than $11.85. But if ATVI shares turn around to the upside, investors could take profits and sell these calls prior to the beginning of next year.