Hungry for Lions Gate Calls Ahead of Earnings

by Joseph Hargett | May 30, 2012 9:21 am

Options activity was brisk on Lions Gate Entertainment (NYSE:LGF[1]) yesterday, as 17,285 contracts changed hands, more than four times the stock’s daily average. Taking a closer look reveals a slight skew in favor of calls, which accounted for roughly 54% of Tuesday’s activity. The most popular strikes on the day were the June 12 put, where 6,317 contracts traded on open interest of 5,383 contracts, and the July 12 call, which saw 3,936 contracts change hands on open interest of 3,570 contracts.

LGF should continue to see heavy options activity today, as traders position themselves ahead of tonight’s fourth-quarter earnings report. For the record, the consensus is expecting a profit of 19 cents per share, down from earnings of 26 cents per share in the same quarter last year. Revenue is seen rising roughly 63% to $616 million from $376.9 million a year ago.

Outside of the options pits, there’s plenty of optimism surrounding LGF ahead of tonight’s report. For instance, nine of the 11 analysts following the shares rate them a buy or better, compared to just two holds and no sell ratings. Additionally, the average 12-month price target for LGF rests at $17, representing a hefty 31.7% premium to the stock’s close at $12.91 on Tuesday.

The takeaway here is that LGF could be vulnerable to downgrades or price-target cuts if the company is unable to live up to expectations.

Technically, LGF is currently resting on critical support near its 50-day moving average, which lies just above $12.50. The shares may be down significantly from their March 21 peak near $16 (which occurred just ahead of the blockbuster release of The Hunger Games), but LGF is still sitting on a year-to-date gain of more than 60%. Therefore, the stock deserves quite a bit of the optimism levied against it.

Given the stock’s strong technical backdrop, and the potential for solid fundamental results, options traders might want to consider entering a July 13/14 bull call spread. This spread was offered at 45 cents, or $45 per pair of contracts, placing breakeven at $13.45 — a gain of about 4.1% from Tuesday’s close. A maximum profit of 55 cents, or $55 per pair of contracts, is achievable if LGF closes at or above $14 when July options expire.

  1. LGF:

Source URL:
Short URL: