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Bulls Charge Staples, Inc. (SPLS) on Solid Technicals

Traders bet on continued gains for red-hot SPLS

by 6/14/2013 2:05 PM
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Volume is way up on Staples, Inc. (NASDAQ:SPLS), and it's driven by heavy call trading. To be specific, 12,000 calls have crossed the tape, which is more than six times the usual intraday estimate, and exponentially greater than the 181 puts that have traded.

Far and away the most active option on the day is the July 17 call, where nearly 10,600 contracts have changed hands, 80% at the ask price. With implied volatility up, and open interest at the strike a measly 23 positions, it's safe to assume buy-to-open activity.

The volume-weighted average price (VWAP) for the contracts is $0.15. Therefore, in order for the call buyers to profit, they need SPLS to make the 9.3% jump to $17.15 (strike price plus VWAP), from $15.69, prior to back-month expiration. Whatever happens, however, the traders can rest easy knowing the most they have at stake is the premium paid.

In Staples' options pits, the type of activity we've seen today is an aberration. During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders bought to open over 20,700 puts, compared to just over 3,000 calls, for a 10-day put/call volume ratio of 6.78. The present level of pessimistic favoritism has been surpassed only 3% of the time in the past year.

Even outside of SPLS' options pits, bearishness abounds. Nine out of 15 analysts following the office products name rate it "hold" or worse, and 10% of its stock is sold short -- a total that would take over six sessions to unwind, given typical daily trading volumes.

Daily Chart of SPLS since May 2013

The negativity is surprising, given the fact that -- since May 2 -- SPLS has been riding its 10- and 20-day moving averages to a gain of roughly 20%. To put that in perspective, over the same time span, the S&P 500 Index (SPX) has gained less than 2%. Should Staples, Inc. (NASDAQ:SPLS) continue to outperform, a capitulation from the bears could produce additional upside.


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