Certain stocks don’t tend to elicit much excitement. But that doesn’t mean they have any less profit potential than the so-called “big and exciting” names, especially if you’re playing options.
Such is the case with Office Depot (ODP), which hums along in the shadow of Staples (SPLS), whose market cap is about nine times that of ODP’s. But ODP looks to be setting up for a strong move. And next week’s earnings report could be the catalyst.
The company reports Tuesday before the open, with analysts expecting it to post its first profit in a year. The impressive thing about ODP is what it does after earnings. Over the past four quarters, the stock has gained an average of 15% in the two weeks following each report. That’s the kind of move that will warm any option trader’s heart.
On the chart, ODP has flatlined for the past six weeks, trading just above the $8 level. The 50-day moving average is moving into this area, and could lend some technical support. That could tilt an eventual breakout in favor of the bulls.
Another thing we like about ODP is that expectations heading into earnings appear muted. The put/call ratio is peaking at a relatively high level. Since September, similar peaks were followed by a spurt in the stock price. The short-interest ratio is high, which increases the chances of a short squeeze, especially if ODP rallies after earnings.
And analysts are clearly skeptical of ODP’s prospects, with just two of 17 rating the stock a “buy.” In fact, there are more “sells” on the stock than “buys,” which is very unusual. This tells us that there’s plenty of room for future upgrades, which should give the stock a boost.
With low expectations and a solid post-earnings history, ODP looks poised to make a move higher. What’s more, the shares do not carry the burden of the “buy the rumor, sell the news” scenario that applies to so many high-flyers that have sagged after reporting good numbers.
ODP carries an Earnings Risk Index (ERI) rank of 2, indicating that it is a solid buy heading into earnings. (ERI is our proprietary filtering tool that ranks stocks from 1 [most bullish] to 5 [most bearish] based on a number of technical, sentiment and earnings-related factors.)
With the post-earnings move expected to occur within a couple of weeks, there’s no need to buy a lot of time with an option play. Therefore, we’d suggest the ODP May 8 Calls (ODP 100522C00008000), which you can buy for around 60 cents.
Related Articles:
- 5 Rules of Engagement for Trading Earnings
- 12 Keys to Trading Earnings for Profits
- How to Play a Post-Earnings Move
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