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Play BIG Stock’s Run at All-Time Highs

Buy bull call spreads ahead of Big Lots' earnings report


Big Lots (BIG) will enter the earnings confessional this Friday morning, and Wall Street is all geared up for a positive report. The discount retailer has come on strong during its past two reports, with the BIG stock soaring more than 22% and 13% following the company’s recent fourth-quarter and first-quarter reports, respectively.

big lots big stockJudging from BIG stock’s sentiment backdrop and options activity, many investors are expecting a repeat performance.

Big Lots Earnings Preview and Sentiment

For the record, Wall Street is anticipating Big Lots earnings of 30 cents per share — a 20% improvement over profits of 25 cents per share in the year-ago period. Analysts might have their sights set a bit higher, however, as reports that Big Lots’ whisper number arrives at 32 cents per share.

With the company’s recent momentum, hitting 2 cents above the consensus might not be too big of a stretch for Big Lots, but the company has had a rocky history from a fundamental perspective.

According to Zacks data, Big Lots has missed the consensus estimate twice, matched twice and bested Wall Street’s target four times in the past two years. So, despite the excessive optimism, an earnings beat is not a foregone conclusion.

Speaking of optimism, the bulls are out in force in the brokerage community. According to Thomson/First Call, BIG stock has attracted 10 “buy” ratings and four “hold” ratings, with nary a “sell” to be found. There is room for improvement, however, as the 12-month consensus price target of $49.50 rests a mere 3.2% above yesterday’s close at $47.97.

Not everyone is bullish on BIG, however.

Short sellers have amassed a rather large position heading into the company’s quarterly report. In fact, some 5.4 million shares of BIG stock, or nearly 10% of its total float, are sold short. What this means in layman’s terms is that Big Lots could be vulnerable to a short squeeze situation, where short sellers are forced to quickly buy back their positions to limit losses.

Judging by options activity on BIG stock, short sellers might be hedging their bets against just such a squeeze. Currently, there are 6,821 calls open in the September series of options, compared to put open interest of 2,523 contracts. The result is a very bullish front-month put/call open interest ratio of 0.37, as calls nearly triple puts in the series.

Peak call open interest of 3,499 contracts resides at the in-the-money Sep $45 strike, while another 1,830 contracts are open at the in-the-money Sep $47.50 strike. On the put side, peak open interest totals 1,539 contracts at the out-of-the-money S3p $45 strike.

big stock big lots charts
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Overall, September options implieds for BIG stock are pricing in a potential post-earnings move of nearly 12%. That places the upper bound near $54.30, while the lower bound lies at $42.70.

An upside move would put BIG stock at an all-time high above $50, while a downside move would put the shares in jeopardy of filling in their post-earnings gap following Big Lots’ first-quarter report.

Options Trade on BIG Stock

Those traders looking to jump in on the side of the bulls might want to consider a Sep $47.50/$50 bull call spread.

At last check, this spread was offered at $1.11, or $111 per pair of contracts. Breakeven lies at $48.61, while a maximum profit of $1.39, or $139 per pair of contracts, is possible if BIG stock closes at or above $50 when September options expire.

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

Article printed from InvestorPlace Media,

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