Puts Pile on Marriott Ahead of Earnings

by Joseph Hargett | July 11, 2012 8:10 am

Hotelier Marriott International (NYSE:MAR[1]) is scheduled to release its second-quarter earnings report after the close of trading this afternoon. Analysts are expecting earnings to arrive at 42 cents per share — up 13.5% from Marriott’ profit of 37 cents per share in the same quarter last year.

Historically, the company is on solid fundamental footing when it comes to quarterly reports. During the prior four periods, Marriott has bested Wall Street’s consensus estimate twice, matched views once, and missed expectations once. The result is an average upside surprise of nearly 3%.

Analysts are largely bullish toward MAR. For one, the whisper number (according to EarningsWhispers.com) comes in a penny higher than the consensus at 43 cents per share. Additionally, 12 of the 18 analysts following MAR rate the stock a buy or better, compared to six holds and no sell ratings.

Turning to Tuesday’s activity, options traders were split on MAR. Specifically, the stock saw call volume of 1,520 contracts compared to put volume of 1,540 contracts. The resulting total put/call open interest ratio arrived at 0.98, hinting at a bit of bearish positioning heading into Marriott’s quarterly report.

Peak July call open interest resides at the out-of-the-money 43 strike, totaling nearly 3,400 contracts. Other notable call strikes include the out-of-the-money July 40 strike, with open interest of more than 2,000 contracts, and the July 39 strike, which sports more than 1,900 contracts.

On the put side, peak open interest totals roughly 5,980 contracts at the just out-of-the-money July 38 strike. Meanwhile, another 5,300 contracts are open at the July 39 put, while roughly 3,900 contracts are open at the July 36 and 37 puts.

Stock traders, on the other hand, were a bit more bullish Tuesday. Specifically, about 2 million MAR shares were bought versus 1.88 million shares sold. The result was a bought/sold ratio of 1.08, with a net cash inflow of nearly 5.4 million.

From a technical standpoint, MAR has spent the past several weeks bouncing around between support near $38 and round-number resistance at $40. Yesterday, the stock closed back below its 50-day moving average, with MAR closing just above $38. The next levels of support for MAR lie at $37 and $36.

Taking a look at July implieds, options traders appear to be pricing in a post-earnings move of more than 5%. As such, options traders looking to jump on the MAR bearish bandwagon might want to consider a July 37/38 bearish put spread.

This spread was asked at 50 cents, or $50 per pair of contracts, at the close of trading on Tuesday, placing breakeven at $37.50. The maximum loss is limited to the initial cost of entry, while a maximum profit of 50 cents, or $50 per pair of contracts, is possible if MAR closes at or below $37 when July options expire.

While July options are perfect for a pure earnings-related trade, they expire at the end of this week. More cautious traders might want to give themselves a bit more time for the trade to play out. Fortunately, the August 37/38 also was offered at 50 cents, or $50 per pair of contracts, offering the same profit/loss outlook at the July 37/38 bear put spread.

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

  1. MAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAR

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