Trade Against the Grain Ahead of Texas Instruments Earnings

by Joseph Hargett | October 21, 2013 9:14 am

Texas Instruments (TXN[1]) is facing a flood of pessimism heading into tonight’s third-quarter earnings report. On average, Wall Street is anticipating Texas Instruments earnings of 57 cents per share on revenue of $3.23 billion, down from earnings of 67 cents per share on revenue of $3.39 billion a year ago.

According to, however, expectations could be even lower. Specifically, the Q3 Texas Instruments earnings whisper number arrives at 55 cents per share — 2 cents shy of the consensus.

You can see further evidence of bearish sentiment within the brokerage community. For instance, 31 of the 42 analysts following TXN rate the shares a “hold” or worse, compared to just 11 “buy” ratings. What’s more, the consensus 12-month price target of $38.46 represents a discount of about 6% to Friday’s close at $40.71. In other words, TXN analysts are forecasting the stock to fall nearly 6% over the next year.

Options traders are also considerably bearish ahead of the Texas Instruments earnings report. Specifically, the put/call ratio for the October and November series of TXN options arrives at a sizeable 3.53, meaning that near-term put open interest more than triples call open interest. Furthermore, puts have surged in popularity since the start of October when this ratio was hovering around 1.75.

Taking a closer look at TXN’s open interest configuration reveals that peak call open interest totals a measly 1,271 contracts at the in-the-money Nov 40 strike, while peak put open interest numbers 9,433 contracts at the Nov 40 strike. Other notable accumulations include the 4,722 contracts open at the weekly Oct 40 put, and 2,436 puts residing at the out-of-the-money Nov 38 strike.

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Technically speaking, TXN is currently trading just shy of 52-week high territory, with the shares battling resistance in the $40-$41 region. The stock has momentum on its side, having rallied more than 33% so far this year.

TXN also enjoys solid support at its 10- and 20-week moving averages, which the stock has finished only two weeks below since November 2012.

Traders looking to position themselves ahead of TXN’s earnings report should know that weekly October option implieds are pricing in a potential post-earnings move of only about 3%. This places the upper bound near $42, while the lower bound arrives at $39.42.

Given the solid price action and poor sentiment backdrop for TXN, shares could be primed for a surprise post-earnings rally on any positive data out of the Texas Instruments earnings report — especially since a miss appears to have already been priced into the shares.

Those traders looking for a contrarian play ahead of Texas Instruments earnings might want to consider a November 40/42 bull call spread.

This spread was last offered at 93 cents, or $93 per pair of contracts, placing breakeven at $40.93 — a gain of less than 1% from Friday’s close. A maximum profit of $1.07, or $107 per pair of contracts, is possible if TXN closes at or above $42 when November options expire.

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

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