by Joseph Hargett | May 6, 2014 11:03 am
It’s been a rough ride on Wall Street during the past several weeks, and the latest round of corporate earnings has done little to ease investor concerns. With a plethora of reports still on the docket, we can expect more volatility in the coming days.
Today, I’m going to take a closer look at a trio of companies set to release their quarterly reports after the close of trading this Thursday. What’s more, all three have the potential for added volatility due to high short interest levels, making them prime candidates for potential options trading ideas ahead of earnings.
Without further ado, let’s drill down into Keurig Green Mountain (GMCR), Tesla Motors (TSLA) and Transocean (RIG) and some attractive options trades.
Click to Enlarge Famous for its K-Cups and easy-to-use single-serving coffee brewers, Keurig Green Mountain (GMCR) shocked Wall Street back in February when Coca-Cola (KO) announced a $1.2 billion investment in the company’s new Keurig Cold system. Wednesday’s Keurig earnings will have investors looking for progress on the new at-home carbonated beverage dispenser, as well as updates on launch dates for the Keurig 2.0, K-Cup pricing and the potential impact of rising coffee prices.
Overall, analysts are projecting a profit of 95 cents per share from Keurig, but EarningsWhisper.com places the whisper number 6 cents higher at $1.10 per share. Optimism is high within the brokerage community, as Keurig stock has attracted seven “buy” ratings, six “holds” and no “sell” ratings.
But the optimism stops with the Street. Currently, short interest totals 157 million shares, totaling 12.3% of GMCR’s total float (or shares available for public trading). And if these short sellers are worried, they don’t seem to be buying call options to hedge their positions; the May/June put/call open interest ratio for GMCR stock arrives at an elevated reading of 1.07.
Short-term pessimism appears warranted, with GMCR stock retracing most of the gains made following the KO investment news. Keurig has plunged from a high near $125 in February to hover just above potential support at $90, placing GMCR stock at oversold levels. Immediate overhead resistance rests at $95 and $100, while long-term support resides near $84 in the form of GMCR’s 200-day moving average.
Weekly May implieds are pricing in a potential post-earnings move of more than 10% for GMCR stock, placing the upper bound near technical resistance at $103, while the lower bound resides near technical support at $84.40.
Options trade: Those looking to position themselves ahead of GMCR earnings might want to consider siding with the brokerage community by entering a bull call spread. At last check, the monthly June $90/$100 bull call spread was offered at $4.95, or $495 per pair of contracts. Breakeven lies at $94.95, while a maximum profit of $5.05 is possible if GMCR stock closes at or above $100 when June options expire.
Click to Enlarge Wall Street is expecting a profit of 12 cents per share out of Tesla Motors (TSLA) on Wednesday evening. The company is facing key sales hurdles related to dealership laws across the company, and any news on this front could have a major impact on TSLA stock. Additionally, Wall Street will be looking for updates on the company’s coming “gigafactory,” progress and pre-order deposits on the Model X, headway with sales inroads in China, and Model S sales growth.
Optimism is muted for TSLA stock in the brokerage community. The whisper number for TSLA earnings arrives 3 cents higher than the consensus at 15 cents per share, but eight of the 14 analysts following the stock rate it a “hold” or worse. Additionally, the 12-month price target of $226 represents a premium of about 4-5% to TSLA’s current trading range.
Elsewhere, short sellers have placed significant bets against Tesla stock, with more than 25.8 million shares sold short. This collective accounts for about 28% of TSLA’s total float, and could provide fuel for a short-covering rally on any positive news.
Technically, TSLA is rebounding from an oversold condition. Tesla stock has reclaimed the 200 level, and is looking to push past its 50-day moving average once again. Short-term resistance lies near $230-$235, while a more significant hurdle rests at $265. Support lies in the $190-$200 range.
Not surprisingly, May implieds for TSLA stock suggest that the shares could move as high as $236 or as low as $195 following Tesla earnings – a potential post-earnings move of about 9.6%. Given the excessive pessimism levied against the stock despite its long-term uptrend, I’m inclined to bet against the grain ahead of TSLA earnings.
Options trade: One potential trading idea is opening a June $200/$240 bull call spread. This spread was last offered at $17.05, or $1,175 per pair of contracts. Breakeven lies at $217.05, while a maximum profit of $22.95 is possible if TSLA stock closes at or above $240 when June options expire.
Click to Enlarge Last, but not least, open-water drilling concern Transocean (RIG) will join the earnings parade after the close of trading on Wednesday.
Wall Street is anticipating a profit of $1 per share from the oil and gas services firm, but many are concerned that a slowdown in offshore drilling could negatively impact these results. On the other hand, a surprise could be in the making, as Transocean is seeing higher daily rates. Meanwhile, the company also has confirmed that it will spin off part of its fleet as part of an agreement with billionaire investor Carl Icahn.
Overall, not too many brokerage firms are on board with Transocean’s direction. According to Thomsons/First Call, RIG stock has attracted just six “buy” ratings, compared to 21 “holds” and 11 “sell” ratings. The stock is also trading north of the consensus 12-month price target of $42.
Elsewhere, short interest totals 43 million shares, or 13.8% of the stock’s total float, and RIG’s May/June put/call open interest ratio arrives at an elevated reading of 0.89.
Technically, RIG stock looks top heavy, despite its months-long decline from its November highs near $55 in November. Shares have tried to bounce back, regaining some ground after hitting a low near $38 in March, but resistance near $44 has halted RIG stock once again.
May implieds for RIG stock don’t look very promising, pricing in a potential post-earnings move of only about 4%. This places the upper bound near $44.87, with the lower bound arriving at $41.13.
Options trade: Those looking to trade RIG heading into this week’s earnings report might want to side with the bears on this one by entering a June bear put spread. At last check, the June $40/$43 bear put spread was offered at $1.34, or $134 per pair of contracts. Breakeven lies at $41.66, while a maximum profit of $1.66 is possible if RIG closes at or below $40 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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