Office Depot (NYSE:ODP) is trading below $4 per share and has lost 90% of its value in the last five years. Jim Cramer isn’t a fan. Earnings are expected to drop 42% per year over the next half-decade.
And yet, bulls were out in full force on Tuesday, buying up calls on the beleaguered office-supply retailer. The October 4-strike call saw more than 15,000 contracts trade on open interest of just 155. When options volume exceeds existing open interest, it’s traditionally a sign that traders are opening new positions.
Placing a Big Bullish Bet
According to trading-floor contracts, one block of 13,000 contracts traded in one fell swoop for 37.5 cents per contract. This was near the ask price at the time, suggesting the calls were bought to open. The entire block was worth $487,500, or 13,000 contracts times 37.5 cents times the factor of 100, as each option contract represents 100 shares.
This long call is a bet that ODP will be trading above the breakeven price of $4.375 by October options expiration. Though the stock has 220 days to make this upward move, the option currently has a delta of just 44%, implying a less than 50/50 chance that the calls will be in the money by the time expiration rolls around. (Of course, long call buyers have the right to close their position at any time between purchase and expiration.) If ODP fails to move higher, the maximum risk is 100% of the premium paid.
A Volatility Bet
Another group of option traders wagered on short-term volatility in ODP shares by trading the April 3.5 long straddle. They bought 2,500 April 3.5 calls for 17.5 cents each and simultaneously bought 2.500 April 3.5 puts for 37.5 cents each. That’s a combined debit of 55 cents per straddle, and it will be profitable if ODP makes a dramatic move in either direction during the next five weeks before April options expire.
The straddle will be profitable at expiration if ODP is trading above $4.05 or below $2.95 — the strike price plus and minus the total credit paid, respectively. Potential gains for a long straddle are unlimited if the underlying stock rallies, and is capped only by zero if the stock declines. Losses, like with a long call, are contained to the premium paid, plus any commissions or fees.
An interesting volatility note on ODP: While implied volatility has dropped from 74% to 58% during the past month, historical (or actual) volatility has actually increased. The stock’s 10-day historical volatility reading has risen from 60% one month ago to 106% currently. In other words, expectations for future volatility are lower than actual volatility numbers during the past month! These straddle buyers aren’t buying it, however, hence the bet on a sharp move higher or lower.
ODP shares rose about 6.5%, to close at $3.41, on Tuesday, possibly due to news of increased spending. The retailer said it will earmark $160 million toward improving e-commerce functionality and other info-tech efforts. These improvements will be critical to the company’s reduced reliance on bricks-and-mortar stores.
As of this writing, Beth Gaston Moon does not own any shares mentioned here.