Weight Watchers Options Hot After Analyst Screams 'Buy'

WTW stock hit a seven-year high earlier

Shares of Weight Watchers International, Inc. (NYSE:WTW) have jumped 7.2% to trade at $85.27, and earlier hit a seven-year high of $86.76. BofA-Merrill Lynch became the latest brokerage firm to pour love on WTW stock -- initiating coverage with a "buy" rating and $95 price target, and saying the Oprah-endorsed company should lead the weigh management pack in terms of sales and profit growth over the long term. Options traders, meanwhile, are betting on a short-term retreat.

With about an hour left in the session, roughly 5,000 calls and 4,100 puts have changed hands on Weight Watchers -- double the expected intraday amount, and volume pacing in the 91st annual percentile. The January 2019 55-strike put is most active, though it's not clear if these contracts are being opened or closed.

However, buy-to-open activity has been detected at the June 82.50 put. If this is the case, breakeven for the put buyers at next Friday's close -- when the front-month options expire -- is $81.26 (strike less the option's volume-weighted average price of $1.24).

While some of this activity could be at the hands of shareholders initiating portfolio protection, there's skepticism seen outside of the options pits. More than 5.5 million WTW shares are currently sold short -- a whopping 20% of the stock's available float.

Whatever the reason speculators are targeting put options, it's an attractive time to buy premium on WTW. The stock's Schaeffer's Volatility Index (SVI) of 37% ranks in the 2nd annual percentile, meaning short-term options are pricing in low volatility expectations.

Looking at the charts, today's upside is just more of the same for Weight Watchers stock. Year-over-year, the security has more than tripled. Plus, a recent pullback from its mid-May peak was quickly contained in the $75-$77 region, home to the equity's February highs, as well as its 20- and 30-day moving averages, and the shares are now within striking distance of their May 2011 record peak of $86.96.