Filling Up on Calls Ahead of Constellation Brands Earnings

by Joseph Hargett | April 4, 2012 8:58 am

Blackstone wine, Constellation Brands (STZ)[1]Constellation Brands Inc. (NYSE:STZ[2]) has attracted quite a bullish following ahead of the company’s fourth-quarter earnings report. From analysts at Goldman Sachs Group, to Jim Cramer, to an influx of call option open interest, quite a few investors looking for a post-earnings rally from the leading international wine company. But with revenue growth steadily declining since 2007, can Constellation Brands provide these bulls with any fresh rally fuel?

Currently, Wall Street analysts are expecting a profit of 38 cents per share from the company, with revenue projected to drop 12.4% to $626.7 million from a year ago. Earnings estimates have risen heading into the event, adding a penny per share from 37 cents just three months ago. Furthermore, the whisper number, according to, arrives at an optimistic 40 cents per share.

From a historical perspective, the whispers may be onto something. During the prior four reporting periods, Constellation Brands has bested the consensus estimate three times, with an average upside surprise of 18.6%.

These lofty expectations haven’t slowed bullish commentary in the financial media. In fact, “Mad Money” host Jim Cramer listed Constellation Brands’ earnings report[3] as one of the events he is watching this week. According to Cramer, the company “has been making a series of positive moves, and he wouldn’t be surprised if the stock continues its great performance.”

Even brokerage firms are getting in on the act, as Goldman Sachs upgraded STZ[4] to “buy” from “neutral” yesterday. However, not every brokerage firm is as bullish as Goldman, with Thomson/First Call reporting that only four of the 12 analysts following STZ rate the shares a “buy” or better, compared to seven “holds” and one “sell.” Additionally, the stock is trading north of the consensus 12-month price target of $22, closing at $24.50 on Tuesday.

In the options pits, speculative traders appear to be falling over themselves in their rush to snap up calls. For instance, STZ attracted call volume of 2,491 contracts on Tuesday, versus put volume of just 89 contracts. It is this type of call-heavy trading activity that has sent the stock’s front-three-month put/call open interest ratio plunging from a reading of 1.06 on Friday to just 0.45 yesterday – the lowest reading of the past year, according to data from

Where are all these calls piling up? At the in-the-money April 22.50 and out-of-the-money April 25 strikes, which sport open interest of about 1,000 contracts each. The May 25 call is also relatively popular, with more than 1,600 contracts in residence. Just after the close of trading on Tuesday, these options were asked at $2.15 (April 22.50), 40 cents (April 25), and 60 cents (May 25).

Unfortunately for call buyers, implied volatility on these options is considerably high. For instance, implieds for the April 22.50 call arrive at 29%, versus STZ’s one-month historical volatility of 15.39%. Implied volatility for May options is only slightly better, with implieds for the May 25 call coming in at 25%, versus STZ’s two-month historical volatility of 17.48%. In layman’s terms, high implied volatility means you will pay more for these options, thus reducing your potential profit.

In order to combat these rising implieds, traders looking to play Constellation Brands’ earnings report might want to consider a bull call spread – assuming you are following the crowd and betting on a post-earnings rally. For instance, buying an April 22.50 call and selling an April 25 call at the close of trading on Tuesday would have set you back $1.85, or $185 per pair of contracts. The maximum profit on this trade comes in at 65 cents, or $65 per pair of contracts, and is reached if STZ closes at or above $25 when April options expire.

Those investors looking to bet countertrend, or contrarian, might want to consider entering a bear put spread on STZ. At the close on Tuesday, buying an April 25 put and selling an April 22.50 put would have resulted in a net debit of 95 cents, or $95 per pair of contracts. A maximum profit of $1.55, or $155 per pair of contracts, is reached if STZ closes at or below $22.50 when April options expire.

As of this writing, Joseph Hargett does not own any shares mentioned here.


  1. [Image]:
  2. STZ:
  3. listed Constellation Brands’ earnings report:
  4. Goldman Sachs upgraded STZ:

Source URL:
Short URL: