by Joseph Hargett | June 3, 2014 9:03 am
Joy Global (JOY) is set to take the earnings stage ahead of the open Thursday, and investors could be in for a bit of a surprise. Currently, analysts are anticipating a profit of 70 cents per share from the heavy mining equipment maker, but recent analyst activity hints at an earnings beat for Joy Global, creating a potentially lucrative situation for savvy JOY stock traders.
Joy Global earnings expectations have received several favorable revisions from the brokerage community during the past three weeks. Typically, analyst revisions this close to an earnings report are indicative of an upside surprise. Additionally, Joy Global’s earnings whisper arrives at 71 cents per share, a penny better than the consensus.
Despite this budding enthusiasm, expectations overall are pretty low when it comes to Joy Global’s prospects. Currently, only seven analysts following JOY stock rate it a “buy,” compared to 15 “holds” and one “sell.” Meanwhile, the consensus price target of $60 rests a mere 3.4% above the stock’s Monday close at $58.02.
Elsewhere, short sellers have loaded up on short JOY positions. According to data from the most recent reporting period, some 21 million shares of JOY stock are sold short, accounting for a hefty 21% of the stock’s total float, or shares available for public trading. This wealth of short interest creates significant potential for a short-squeeze situation, especially in the event of a better-than-expected Q2 earnings report.
These short sellers may be getting worried, however, as call options are growing increasingly popular heading into Joy Global earnings. The June put/call open interest ratio arrives at 0.69, with calls (or bets that JOY stock will rally) easily outnumbering puts in the front month. Zeroing in on June 7 weekly options, the put/call open interest ratio plummets to a reading of 0.41, with calls more than doubling their put counterparts. With heavy short interest, and a potential earnings beat on tap, you can bet that some of these calls were opened by short sellers as hedges against a potential JOY stock rally.
Click to Enlarge Overall, June 7 weekly implieds are pricing in a post-earnings move of about 5% for JOY stock, placing the upper bound near $60.85 and the lower bound near $55.15. These levels roughly correspond with current areas of technical resistance, with JOY’s 50-day moving average hovering near $59, and the 200-day trendline perched just north of $55. Breaches of either of these key technical indicators could spark a larger-than-anticipated move.
Traders looking to position themselves ahead of Thursday’s report might want to seriously consider a taking a contrarian stance. While the bearish sentiment on JOY stock is par for the course, a positive earnings report could force these naysayers to reconsider their positions, prompting upgrades or an unwinding of short interest. As such, a July $57.50/$60 bull call spread could prove to be quite profitable.
After the close of trading last night, this spread was offered at 92 cents, or $92 per pair of contracts. Breakeven lies at $58.42, while a maximum profit of $1.58, or $158 per pair of contracts, is possible if JOY closes at or above $60 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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