Hewlett-Packard Co. Earnings Preview: 2 Trades for HPQ Stock

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Hewlett-Packard Co. (NYSE:HPQ) is slated to release its first-quarter earnings figures after the close of trading tomorrow night, and expectations are low on Wall Street. Currently, the consensus is projecting a profit of 86 cents per share for HPQ, down 2.3% year-over-year. Revenue, meanwhile, is seen slipping 6.1% to $25.6 billion.

Hewlett-Packard Co. Earnings Preview: 2 Trades for HPQ StockCurrency translation will receive most of the blame for the decline, with most in the brokerage community doubting that HPQ will even hit current consensus estimates for the quarter. Hewlett-Packard has struggled considerably with the decline in the PC and printer markets, and the company has made practically no effort to follow its blue-chip peers into the cloud.

In fact, when HPQ acquired Aruba Networks earlier in the quarter, some wondered if there weren’t better targets for Hewlett-Packard in the cloud that could help the company follow the rest of the technology space’s migration.

On the sentiment front, the brokerage community is cautiously optimistic when it comes to HPQ stock’s outlook. According to data from Thomson/First Call, the stock has attracted 16 “buy” ratings, compared to 12 “holds” and one “sell” rating. Furthermore, the current 12-month consensus price target for Hewlett-Packard arrives at $40.50 — a modest premium of about 21.2% to Tuesday’s close.

Elsewhere, options traders are also divided on HPQ stock. Currently, Hewlett-Packard’s May/June put call open interest ratio comes in at a middling 0.95. When we take a closer look at the data, we find a dividing line for the shares. Specifically, the weekly May 22 series put/call open interest ratio sits at 0.63, pointing toward a bullish bias, while the June ratio rests at 1.12, with puts clearly gaining favor.

The takeaway here is that options traders appear to be betting on a short-term, but unsustainable pop from HPQ stock following earnings.

05-20-2015 HPQ
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 Overall, weekly May 22 series implies are pricing in a potential post-earnings move of about 5% for Hewlett-Packard. This places the upper bound near $35.18, while the lower bound lies at $31.82. These levels roughly correspond with key technical support and resistance levels, with HPQ’s 200-day trendline capping the shares in the $35 region, while the stock’s April lows from the lower rail.

A breach of this range could elicit heavy follow-through selling/buying for HPQ, but the company would have to surprise traders and analysts with tomorrow’s report for any significant breakout. Think stronger-than-expected guidance or a decisive move into cloud technology.

2 Trades for Hewlett-Packard Stock

Put Spread: There are only so many ways Hewlett-Packard can improve earnings and revenue through layoffs and restructuring, and with no cloud presence, it may remain business as usual for the company. As such, the path of least resistance for HPQ stock remains to the downside.Traders looking to bet against the stock heading into tomorrow’s quarterly report might want to consider a Jun $32/$33 bear put spread.

At last check, this spread was offered at 32 cents, or $32 per pair of contracts. Breakeven lies at $32.68, while a maximum profit of 68 cents, or $68 per pair of contracts, is possible if HPQ closes at or below $32 when June options expire.

Call Spread: On the other hand, while Hewlett-Packard is not expected to top earnings expectations, the company could still score big with institutional traders with some well worded guidance. As such, those traders willing to bet on a bounce in HPQ stock might want to try out a weekly May 22 series $34/$35 bull call spread.

At last check, this spread was offered at 29 cents, or $29 per pair of contracts. Breakeven lies at $33.71, while a maximum profit of 71 cents, or $71 per pair of contracts, is possible if HPQ closes at or above $35 when May options expire at the end of this week.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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