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Office Depot Draws Long-Term Option Bulls on Comforting Comments

Options traders bought to open long-term calls on ODP

by 9/8/2011 10:30:19 AM
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Supply chain Office Depot, Inc. (ODP - 2.58) was targeted by option bulls on Wednesday, after company executives offered comforting words to shareholders.

Speaking at the Goldman Sachs retail conference in New York, CEO Neil Austrian warned of weakening economic conditions in 2012, but said the company's initiatives to drive sales and margins should "more than offset" any mid-single-digit revenue declines brought on by broad-market headwinds. In addition, the exec projected improving margins in the third quarter, and said he expects the firm to get back to adjusted earnings margins of 3% to 4% by the end of 2013.

Meanwhile, Austrian downplayed the odds of a merger with OfficeMax (OMX), which he said would incur "significant costs," not to mention face big regulatory hurdles. Furthermore, Kevin Peters, president of a newly combined retail/delivery unit, said he was "tickled to death" by ODP's back-to-school performance -- compared to sector peers OMX and Staples (SPLS), which both confessed to lackluster back-to-school seasons.

In light of the encouraging words, the shares of ODP shot higher on Wednesday, finishing north of their 10-day and 20-day moving averages for just the second time in as many months. Now, however, the equity is struggling to surmount the $2.60 neighborhood. This region provided support for ODP in the first half of August, but has since switched roles to act as resistance.

Daily chart of ODP since July 2011

Nevertheless, as alluded to earlier, more than a few option bulls are betting on the stock to overcome its short-term challenges on the charts. By yesterday's closing bell, ODP had seen roughly 12,000 calls cross the tape -- about five times its average single-session volume of fewer than 2,300 calls. For comparison, not even 850 ODP puts changed hands.

Upon closer inspection, we find that nearly all of the action centered on the out-of-the-money January 2012 3-strike call, which saw almost 10,500 contracts traded -- mostly at the ask price, suggesting they were bought. Plus, almost all of the volume translated into new open interest overnight, confirming our suspicions of buy-to-open activity. By purchasing the LEAPS calls to open, the buyers are betting on ODP to power atop the $3 level by the time January options expiration rolls around.

Elsewhere on the Street, most analysts are -- unsurprisingly -- skeptical of the stock, which has underperformed the broader S&P 500 Index (SPX) by about 33% during the past 40 sessions. According to Zacks, only three brokerage firms offer up "buy" or better endorsements, compared to 11 with "hold" or worse opinions of the security. From a contrarian standpoint, though, this bearish backdrop leaves ODP ripe for upgrades, should the stock -- as those LEAPS buyers expect -- embark on a steady rebound through the end of the year.


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