by Joseph Hargett | March 5, 2014 8:51 am
As the biggest office supply store in the world, Staples (SPLS) is no slouch — especially since the company operates the second biggest e-commerce website on the Internet, falling behind only Amazon.com (AMZN) in terms of annual sales. Unfortunately, SPLS stock has been in the doghouse during the past several months, pressured by a struggling global economy.
What’s more, competitor Office Depot (ODP) was recently hammered in the wake of a completely disappointing quarterly earnings report, dragging SPLS stock along in its slipstream.
But Staples has a chance this week to make up for some of its short-term woes and potentially set SPLS stock on a course higher once again. Ahead of Thursday’s open, Staples is slated to slip into the earnings confessional to release its fourth-quarter report.
Currently, analysts are expecting Staples earnings of 40 cents per share on revenue of $5.98 billion, compared to year-ago results of 12 cents per share on revenue of $6.57 billion. Some on Wall Street have their sights set a bit lower, however, with EarningsWhisper.com reporting a fourth-quarter whisper number of 38 cents per share for SPLS.
This type of negativity from the analyst community is par for the course for SPLS stock, however. According to data from Thomson/First Call, SPLS stock has attracted just four “buy” ratings, compared to 12 “holds” and two “sells.” Meanwhile, the brokerage community isn’t expecting much growth from SPLS over the coming year, with the 12-month consensus price target of $15 per share representing a premium of only about 11% to yesterday’s close at $13.46.
Short sellers also are betting decidedly against any significant upside for SPLS stock. Following a 4% rise during the most recent reporting period, roughly 85.6 million SPLS shares are now sold short, representing roughly 13% of the stock’s total float, or shares available for public trading. Positive earnings data from SPLS this week could spark a potential short-covering rally.
If short sellers are worried about a potential post-earnings rally, it clearly isn’t evident in Staples’ open interest configuration. Currently, SPLS stock sports call open interest of 27,763 contracts in the March/April series, compared to put open interest of 64,334 contracts. The resulting put/call open interest ratio arrives at 2.31, with puts more than doubling calls in the front two months.
The scenario is the same when we zero in on the front-month March series, which sports at put/call open interest ratio of 2.39. Peak put open interest for March totals 36,008 contracts at the 13 strike, while another 14,836 puts reside at the March 12 strike. Peak call open interest for this series, meanwhile, totals 7,746 contracts at the March 14 strike.
Technically speaking, the $14 level is a key hurdle for SPLS stock, historically providing both support and resistance for the shares. The $14 region is also home to SPLS’ descending 50-day moving average. This long-term trendline formed a bearish cross with its 200-day counterpart back in January, prompting a selling spree that saw SPLS stock plunge to fresh lows near 11. The $15 region is the next potential area of resistance, while the $13 area should help provide technical support for SPLS.
For those looking to trade SPLS stock options ahead of Thursday’s quarterly report, March option implieds are pricing in a potential post-earnings move of about 5.5%. This places the upper bound near $14.25, right in the middle of chart congestions, while the lower bound lies at $12.75, just below technical support at $13.
With the bar already set pretty low, and Office Depot driving that earnings nail in last week, I believe most of the negativity facing SPLS stock is already priced in. As such, the likelihood of a potential earnings surprise, or positive reaction, is pretty high.
Keying off this, traders looking to bet on a SPLS bounce might want to consider buying an April 12 call.
At last check, the SPLS April 12 call was asked at $1.75, or $175 per contract. The initial outlay of $1.75 represents your maximum potential loss, while breakeven for this trade lies at $13.75.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2014/03/staples-spls-stock-options/
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