If there’s any one truth about the American consumer that traders can depend on, it’s that pet-owning households love their four-legged family members. That should typically bode well for online pet products retailer Chewy (NYSE:CHWY). However, things have not been looking so hot in 2024, with shares down 25% so far. Savvy traders should keep hope though and keep close tabs on CHWY stock call options.
First, the fundamentals of the underlying business are strong. According to data from the American Pet Products Association, total U.S. pet industry expenditures totaled $147 billion last year. That represented a lift of 7.46% from the prior year’s tally of $136.8 billion. Not even the Covid-19 pandemic and the ill effects of high inflation and elevated borrowing costs have dented pet spending.
What’s more, experts project that by the end of this year, the pet industry could generate sales of $150.6 billion. At a time when consumers have started to cut back on discretionary spending, the continued expenditures on pet products and services is encouraging.
Notably, for this fiscal year, analysts anticipate Chewy’s revenue to reach $11.18 billion, up 10.7% from last year’s print of $10.1 billion. Yet over the past 52 weeks, CHWY stock lost 56% of equity value. There could be a turnaround coming.
Chewy Might Benefit from a Technical Air Pocket
First, the supporters of CHWY stock are attempting to hold support at $16. That seems reasonable given that the bears attempted to drive the price down on Feb. 21 but failed. Second, with shares closing at $16.68 on Tuesday, the next psychological target for optimists would be $17. Enticingly, that’s where a technical air pocket exists.
According to Barchart’s options flow data – which screens for big block transactions likely placed by institutional investors – there are several high volume or high open interest trades that feature bearish sentiment at the $16 and $17.50 strike prices. Interestingly, though, there is only limited volume and open interest for bearish options at the $17 strike.
This dynamic implies that because CHWY stock breached resistance barriers at $16 and below, the next natural target is $17. Further, traders may be able to ride up CHWY to near $17.50 before another wave of resistance kicks in.
From an investment perspective, Chewy might be worth betting on for the long haul. However, for short-term traders, there’s a clear zone of opportunity between $17 and $17.50 that could be advantaged.
Trade of the Day: Buy CHWY Stock Call Options
With limited bearish options activity between the strike prices $17 and $17.50, traders should consider buying the 22 March 2024 CHWY $17 call option. On Tuesday, the contract closed with a premium of $1.06. The bid-ask spread (as represented by the midpoint price) at the time was only 1.9%.
The idea here is to wager that CHWY stock will move toward the $17 level by end of day Wednesday. Even a half-a-percent move to $16.76 (from Tuesday’s close of $16.68) could theoretically boost the aforementioned call option’s premium to $1.10, giving the trader a 3.8% swing. But no matter what, traders should be prepared to close the position before the session’s closing bell.
Although this is a one-day trade, so long as the market remains relatively buoyant, the bulls could try to push CHWY stock to as close to $17.50 as possible. Therefore, traders could potentially have multiple swings at the bat before the bears take control of the situation.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
