The Best Way to Follow the Smart Money In Tupperware Stock

Shares of Tupperware (NYSE:TUP) are finally finding some semblance of support. TUP stock rose over 8% yesterday to close above $8 after briefly testing the all-time lows near $7 to begin the day. This for a stock that started the year trading at over $30 per share. More importantly, Tupperware stock saw enormous call option volume as some major player is likely positioning for a pop in TUP. Time to go with the bullish option flow and seal the deal with TUP stock.

The Best Way to Follow the Smart Money In Tupperware Stock

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Tupperware is undoubtedly dirt cheap on a fundamental basis. The current price-to-earnings ratio is approaching 2 and at by far the lowest level ever. Other traditional valuation metrics, such as price-to-sales and price-to-cash flow are also at ridiculously low multiples.

The last four quarters have been ugly for Tupperware. TUP has fallen short of analysts earnings estimates in four straight quarters. It also recently suspended its dividend, which caused additional angst. Important to remember, however, that Tupperware is still making money. Expectations are for 49 cents in earnings when TUP reports on Jan. 29. Tupperware is at levels that should begin to attract value investors and private equity alike.

The chart for Tupperware is no thing of beauty. TUP stock has been in a steady decline for all of 2019, falling some 70% so far this year. Each earnings report was met with a gap lower. Recently, though, Tupperware stock has shown signs that the worst may be coming to an end.

Source: The thinkorswim® platform from TD Ameritrade.

The 9-day RSI has turned higher after being deeply oversold. Its MACD has recently generated a buy signal by going positive. And momentum has also improved dramatically. Yesterday’s price action was encouraging with TUP stock opening lower before reversing sharply to close significantly higher on the day. This type of reversal pattern is many times emblematic of a wash out low. The sellers have become exhausted and the buyers have taken control.

The call buyers certainly took control in the options market yesterday. Over 22,000 contracts of the Jan $7.5 calls traded versus just 413 in open interest. The overall call volume today was over 40 times the normal volume. The 22,640 contracts represents a potential obligation of 2,264,000 shares of TUP stock. These big buyers certainly think the worst may be over for TUP stock.

The big call buying helped drive the stock higher as market makers scrambled to hedge their positions. The big call buying also drove the implied volatility (IV) of the options dramatically higher as well.

The IV on the Jan $7.5 calls jumped from under 55 on Monday to well over 75 yesterday. These calls were up 55 cents with TUP stock rising 65 cents. Given that these were a roughly 60 delta option, the expected move for the Jan $7.5 calls would have been roughly 40 cents (.60 delta times .65 gain in the stock). In other words, these options are theoretically overvalued by 15 cents. This sets up ideally for a covered call trade that leans bullishly with the big call buying while at the same time capturing some comparatively rich option premium.

A TUP Jan $7.5 covered call trade would entail buying TUP stock and selling the Jan $7.5 to hedge. Sell 1 call for each 100 shares of stock purchased. Based on the closing prices the trade would cost about $7.10 net ($8.15 stock less $1.05 for call sale).

The covered call trade is 40 deltas net long at inception (100 deltas for stock bought less 60 deltas for call sold=40 deltas). This is equivalent to 40 shares of stock for each covered call, so it’s less risk than owning the stock or the calls outright. Plus it captures the 15 edge by selling the overvalued calls.

Ideally, TUP closes above $7.5 at January expiration and the stock will be called away for a net gain of 40 cents, or 5.63%. If TUP is below $7.5 at January expiration, additional longer-term covered calls can be sold to further hedge the position and lower the initial cost.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in receiving finding out more about unusual option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/the-best-way-to-follow-the-smart-money-in-tupperware-stock/.

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