The Bull’s Way to Trade CVS Stock Before Earnings

by Joseph Hargett | August 1, 2014 8:43 am

The shares of pharmacy operator CVS Caremark (CVS[1]) have been beaten down during the past week, with CVS stock taking its cues largely from the broader market. But, given the stock’s strong historical price action, and the company’s long-term prospects, this short-term pullback might provide an opportunity for investors — especially with CVS earnings slated to hit the Street early next week.

CVS stock chart
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For the record, analysts are looking for CVS earnings of $1.10 per share when the company reports next Tuesday — that would be up 13 cents per share from the same quarter last year. Revenue, meanwhile, is seen rising roughly 7% to $33.47 billion.

Expectations might be a bit on the high side, however, with reporting a whisper number of $1.13 per share for CVS earnings. That said, CVS has a history of topping Wall Street’s forecasts, with Zack’s data indicating that the company has beaten the consensus estimate in all but three quarters during the past five years.

Taking a closer look at the brokerage community, we find that 20 of the 26 analysts following CVS stock rate it a “buy” or better, compared to just six “holds” and no “sell” ratings. There is room for improvement, however, with the consensus 12-month price target of $82 per share representing a meager premium of only about 7.4% to yesterday’s close.

Turing to the options pits, calls are the investment vehicle of choice heading into CVS earnings. Currently, there 19,296 calls open in all August contracts, compared to 11,410 puts. The result is a bullishly skewed front-month put/call open interest ratio of 0.59. The most popular calls are the Aug $77.50 and $80 strikes, which both sport more than 5,000 contracts each.

Overall, August implieds are pricing in a potential post-earnings move of about 3% for CVS stock. This places the upper bound near $78.84, while the lower bound lies at $74.16.

Options Trade on CVS Stock

Traders looking to take advantage of CVS’ current oversold situation heading into next week’s earnings report might want to consider an Aug $76/$79 bull call spread.

At last check, this spread was offered at $1.19, or $119 per pair of contracts. Breakeven lies at $77.19, while a maximum profit of $1.81, or $181 per pair of contracts, is possible if CVS stock closes at or above $79 when August options expire.

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

  1. CVS: /stock-quotes/CVS-stock-quote/

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