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Williams-Sonoma: Pre-Earnings Options Plays

Why was Tuesday's put volume nine times the average one-month put volume?


Williams-Sonoma (NYSE:WSM) is reporting earnings before the open tomorrow, and option traders have been notably active ahead of this news. Yesterday, about 17,000 options traded hands — 11,000 on the put side and 5,000 on the call side.

According to Steve Claussen, chief investment strategist at OptionsHouse, “Williams Sonoma normally trades more puts than calls, but [Tuesday] the put volume was nine times the [average one-month volume].”

Much of that volume centered on the March 39- and 41-strike puts, as 5,000 contracts traded on each. Claussen observes that these puts were likely part of a credit put spread, which was sold 5,000 times for a net credit of $1.50 per spread. It appears as though the 41 puts may have been sold to close and the 39 puts bought to open.

The trader may have been rolling down the higher-strike options in exchange for the 39-strike puts, collecting the difference between the two as profit. Steve says this strategy “allows this investor to take some chips off the table from a profitable put purchase in the 41 puts that was made on Feb. 24.”

The long (purchased) 39-strike puts are then left open and call for WSM to be trading south of the 39 strike at expiration (one week from Friday). Long puts have unlimited gains down to zero and can lose only 100% of the premium paid. The premium for this particular put was offset somewhat through the sale of the higher-strike put.

Last week, option traders opened what appeared to be a short strangle in WSM, targeting a sideways trading range in the shares. In the past week, the realized (aka “actual”) 30-day volatility measure in WSM has dropped from 23.3% to 20.2%. The strangle trade calls for WSM to remain between $35.40 and $41.60 through expiration on March 17; yesterday, the shares closed at $37.45, down 1.55% on the day. Year-to-date, WSM shares are down 2.7%, which is a notably smaller move than the broader market’s 6.8% advance.

Analysts are expecting WSM to report per-share results of $1.13 tomorrow morning. This is a five-cent improvement from year-ago figures. WSM has managed to top analysts’ expectations every quarter for the past eight quarters.

When the specialty retailer last reported earnings, however, the shares fell 1.6% that day despite a 7% positive earnings surprise. Investors may have gone into the news with elevated expectations, and yesterday’s put trader could be hoping for a repeat of this phenomenon. If WSM moves lower (or volatility collapses) after the earnings report, long put options could rise in value.

As of this writing, Beth Gaston Moon does not own any shares mentioned here.

Article printed from InvestorPlace Media,

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