Despite strong fundamental and technical performance, auto parts retailer AutoZone, Inc. (NYSE:AZO) is facing considerable negativity heading into next weekly third-quarter earnings report. For the record, Wall Street is looking earnings to rise 12.4% to $9.51 per share, with revenue seen up 6.8% at $2.5 billion.
AutoZone has a history of beating the consensus, creating an opportunity for savvy AZO stock options traders.
Wall Street appears to be pricing in an earnings beat from AutoZone, with EarningsWhisper.com reporting a third-quarter whisper number of $9.56 per share for the company. However, all optimistic sentiment stops here.
For instance, Thomson/First Call reports that 17 of the 26 analysts following the shares rate them a “hold” or worse. Additionally, the consensus 12-month price target of $680 per share represents a discount to yesterday’s close.
Pessimism is also prevalent among AZO short sellers. As of the most recent reporting period, the number of AZO shares sold short rests at 2.2 million, representing a sizeable 7% of the stock’s total float, or shares available for public trading.
If these shorts are worried, they aren’t buying calls to hedge their bets. AZO’s June put/call open interest ratio has risen during the past couple of weeks to rest at 0.99. With calls and puts in near parity ahead of AutoZone’s earnings report, there is very little indication that options traders are expecting AZO stock to extend its rally much higher.
Click to Enlarge Overall, June option implieds are pricing in a potential post-earnings move of about 5.7% for AZO stock. This places the upper bound at $728.41, while the lower bound lies at $651.59. Technically, AZO has experienced a bit of turmoil of late, with resistance materializing at the $700 level. Support has remained firm at the stock’s 50-day moving average, however, with additional support residing at $660.
2 Trades for AZO Stock
Call Spread: With strong long-term price action, solid fundamentals, and wealth of negative sentiment, AZO stock has a near perfect setup for a contrarian options play ahead of earnings. Those traders looking to buck the sentiment trend and bet against the grain might want to consider a Jun $700/$720 bull call spread.
At last check, this spread was offered at $6.60, or $660 per pair of contracts. Breakeven lies at $706.60, while a maximum profit of $13.40, or $1,340 per pair of contracts, is possible if AZO stock closes at or above $720 when June options expire.
Put Sell: For those more cautious traders not looking to open an outright bullish bet on AZO, a deep out-of-the-money put may be just the way to bank a little profit while relying on technical support. At last check, the Jun $600 put was bid at 92 cents, or $92 per contract.
As long as AZO trades above $600 through June expiration, traders will keep the premium received. If AZO trades below $600 ahead of expiration, however, traders could be assigned 100 shares of AZO stock for every put sold at a cost of $600 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
