Get Bullish on Tiffany With This Call Spread

by Joseph Hargett | November 28, 2012 9:30 am

As Tiffany & Co. (NYSE:TIF[1]) prepares to release its third-quarter earnings report ahead of the open tomorrow morning, the upscale retailer is facing conflicted views on Wall Street. Analysts, on average, are expecting Tiffany’s earnings to decline more than 11% to 62 cents per share — down from a profit of 70 cents per share in the same quarter last year.

Revenue, on the other hand, is expected to rise 4% year-over-year to $857.5 million.

Analysts’ earnings expectations have fallen from 66 cents over the past three months, but undercurrents on the Street seem to indicate that the brokerage community has set its sights even lower. Specifically, data from[2] reveals that the whisper number for Tiffany’s earnings arrives at 61 cents per share — another penny shy of the consensus.

Analyst ratings are also conservatively aligned: TIF has 12 “holds” and 12 “buys,” but no “sell” ratings. Furthermore, the average 12-month price target for TIF of $68.50 rests a modest 9% above the stock’s close at $62.65 yesterday.

Options activity, however, suggests that speculative traders are not taking their cues from the brokerage community. Specifically, TIF’s front-month put/call open interest ratio of 0.49 indicates that calls more than double puts in the December option series.

Taking a closer look, we find that peak December call open interest rests at the out-of-the-money 65 strike, totaling 3,659 contracts. The December 62.50 strike arrives at a close second, with 2,433 contracts in open interest. On the put side, the out-of-the-money December 60 strike is tops with 1,187 contracts open.

Traders looking to follow the options crowd ahead of Tiffany’s quarterly report should know that December implied volatilities are pricing in a potential 8.2% post-earnings move. This means that a December 62.50/67.50 bull call spread lies well within the projected move, should TIF head higher on the news.

At the close of trading on Tuesday, the December 62.50/67.50 call spread was offered at $1.90, or $190 per pair of contracts. As such, break-even for this trade lies at $64.40 (a roughly 2.8% advance from yesterday’s close), while a maximum profit of $3.10, or $310 per pair of contracts, is possible if TIF closes at or above $67.50 when December options expire.

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

  1. TIF:

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