HP Inc (HPQ), the former printer and PC unit of the now split Hewlett Packard Co., is slated to release its fourth-quarter earnings figures after the close of trading Tuesday. Sentiment ahead of the event is mixed, creating a bit of a conundrum for HPQ stock options traders.
Diving into the numbers, Wall Street is currently expecting HP earnings to fall sharply year-over-year, coming in at 44 cents vs. a profit of $1.06 per share a year ago. Revenue is also expected to plunge, dropping 54.8% to $12.84 billion from $28.41 billion a year ago.
Sentiment within the brokerage community is largely positive. According to data from Thomson First Call, the HP stock has attracted 16 “buy” ratings, compared to 13 “holds” and one “sell” rating. Additionally, Maxim Group upgraded HP stock this morning to “buy” with a $17 price target.
Speaking of price targets, there is room for additional improvement, as the current 12-month consensus price target for HPQ stock arrives at $15.50 — a premium of only about 10% to the stock’s current perch.
Options traders, meanwhile, are also divided on HP stock. Currently, HPQ’s November/December put/call open interest ratio comes in at a moderate 0.75. When we take a closer look at the data, however, we find considerable pessimism ahead of HP’s earnings report. Specifically, the weekly Nov. 27 series put/call open interest ratio sits at 1.28, with puts easily outnumbering calls among options set to expire at the end of this week.
The takeaway here is that options traders appear to be betting on a post-earnings plunge, but a longer-term upside for HPQ stock.
Click to Enlarge Overall, weekly Nov. 27 series implies are pricing in a potential post-earnings move of about 5.8% for HPQ. This places the upper bound near $14.81, while the lower bound lies at $13.19. These levels roughly correspond with key technical support and resistance levels, with HPQ’s 50-day trendline resting just below $13 and the $15 level representing a key overhead technical hurdle.
2 Trades for HPQ Stock
Put Spread: Those traders looking to side with the HP stock option bears heading into tomorrow’s report might want to consider a Dec $13/$14 bear put spread. At last check, this spread was offered at 35 cents, or $35 per pair of contracts. Breakeven lies at $13.65, while a maximum profit of 65 cents, or $65 per pair of contracts, is possible if HPQ closes at or below $13 when December options expire.
Call Spread: On the other hand, this is HP Inc.’s first report as an independant company, and a little leeway could be granted to shares in light of the fresh quarter. Those traders looking to side with the brokerage community might want to consider a Dec $14/$15 bull call spread. At last check, this spread was offered at 34 cents, or $34 per pair of contracts. Breakeven lies at $14.34, while a maximum profit of 66 cents, or $66 per pair of contracts, is possible if HPQ closes at or above $15 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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