Options Update: Taser International Sees Heavy Call Volume

Here's today's question: What does online office software have in common with handheld energy weapons? While that question will certainly have me puzzled well into tomorrow's trading session, Taser International (TASR | Quote | Chart | News | PowerRating) investors are cheering the announcement of Jas Dhillon as the company's new Chief Strategy Officer and General Manager of TASER Virtual Systems Division. Dhillon, former head of Business Development and Merger & Acquisition for Microsoft Office Live, has been tapped to fill the positions at Taser.

"Jas's extensive executive experience provides Taser International a critical addition to our management team, enhancing strategic oversight of our significantly expanded research and business development programs," said CEO Rick Smith. Traders seem to agree, sending TASR shares about 7% higher following the addition of Dhillon's 11 years of CEO experience and 12 years of Fortune 100 operational leadership to the Taser upper echelon.

Even options speculators are getting in on the act. More than 11,000 calls have changed hands on TASR so far today, outpacing the average daily call volume for the stock by a ratio of 16.5-to-1. Furthermore, this spike in call volume has earned TASR a spot on our Intraday Volume Explosion List. What caught my eye today, however, was the more than 8,200 calls that traded at the stock's September 7.50 strike, which sports open interest of only 5,632 contracts.

Call Buying on Taser International?

Given the disparity between today's call volume and open interest, the September 7.50 strike should see a rise in the number of open contracts when this activity translates tomorrow morning. For a better gauge of trader intentions, I dove into the trading activity for TASR's September 7.50 call (QUR IU). While I didn't find an exotic strangle position or a speculative straddle position, there were a significant number of blocks changing hands at the ask price. The specific activity is listed in the chart below.

Looking at the notable activity listed above, the most common block size was about 100 contracts, which traded for an average ask price of 21 cents. At last check, the QUR IU was trading at 20 cents. For the sake of argument, let's say we have a hypothetical trader that bought 100 TASR September 7.50 calls for the price of 21 cents, or $21 per contract (0.21 * 100 = $21). The total outlay for this position would be $2,100 ($21 * 100). For our trader to hit breakeven, TASR would have to rally to about $7.71 per share. To arrive at this, we add the cost of the option (21 cents) to the purchased strike (7.50), or $7.71 (0.21 + 7.50).

On a percentage basis, the stock needs to rally 21% from its current trading range near $6.36 per share for our trader to make his money back on the position. Given today's nearly 7% rally in the shares, this seems like a tall order for TASR, especially since September options expire on the 19th. Let's see if the stock's technical picture or sentiment backdrop offer up any clues on the likelihood of our hypothetical trader realizing a profit...

Technically Speaking

Our bullish position on TASR already has a few major hurdles to overcome before we are even out of the gate. Despite the stock's 7% rally today, TASR is off more than 58% on a year-to-date basis. The equity is up sharply after rallying from a basing period along the 5 level; even pulling its 10-day and 20-day moving averages into a bullish cross. Above the shares, however, there appears to be staunch technical resistance at the 7 level, a region that provided support in late May.

The weekly chart above raises even more technical questions for TASR. The stock remains locked in a pronounced downtrend under resistance at its 10-week and 20-week moving averages. Additionally, the 20-week trendline has taken up residence in the 6.50 region, site of the stock's gap lower during the week of June 13. This technical hurdle adds to the already crowded levels of resistance lingering just overhead for TASR.

The Sentiment Drivers

To make matters worse, TASR doesn't have the best sentiment outlook for a bullish options play. Specifically, optimism is running rampant on the shares despite their poor price action. TASR's Schaeffer's put/call open interest ratio (SOIR) of 0.24 ranks below 86% of all those taken during the past year, indicating that speculators have been more hopeful only 14% of the time in the prior 52 weeks.

Meanwhile, Wall Street is also firmly in the bullish camp. According to Zacks.com all 5 analysts following TASR rate the shares a "buy" or better. This lack of "sell" ratings on an underperforming equity is disconcerting, and raises the specter of potential downgrades should the brokerage bunch become disillusioned with TASR.

On the other hand, short interest accounts for a hefty 25% of the stock's total float. In addition, short sellers bought back nearly 5% of their positions during the most recent reporting period. Should TASR breakout above the multiple layers of technical resistance overhead, we could see a this short-covering trend ramp up and provide a potential short-squeeze situation for the equity. This would be a best-case scenario for our hypothetical call trader.

The Verdict?

Even for the low entry price of $2,100 (100 QUR IU contracts at $21), a September 7.50 TASR call is still a rather risky proposition. There are layers of technical resistance that could prove quite a problem for the shares, and the stock's sentiment backdrop doesn't instill much confidence. I just don't see TASR having enough sideline money for the 21% move needed just to reach breakeven.

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