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Option Idea of the Week: Walgreen Company (WAG)

Lingering skepticism on Wall Street suggests WAG's rally has legs

by 3/22/2013 1:35 PM
Stocks quoted in this article:

Drugstore behemoth Walgreen Company (NYSE:WAG - 46.17) has flexed its muscle both on and off the charts this week, reporting solid earnings and shaking up the industry with a massive deal. What's more, there's still ample skepticism surrounding the stock, which could point to more upside on the horizon.

More specifically, Walgreen is partnering with Alliance Boots GmbH to source pharmaceutical products from AmerisourceBergen Corp. (NYSE:ABC), in order to purchase a minority stake in the wholesaler. The 10-year deal will allow Walgreen to boost sales of its more expensive specialty drugs, negotiate better prices for low-profit, bulk prescriptions, and start daily distribution on most of its generics.

The news sent the shares of WAG skyrocketing, with the equity tagging a fresh five-year high of $46.33 on Wednesday. From a longer-term standpoint, the security has outperformed the broader S&P 500 Index (SPX) by almost 16 percentage points during the past three months. In 2013, the stock has added close to 25%, ushered higher atop its 10-week moving average. What's more, WAG has barreled past former resistance in the $44-$45 region, which smacked the stock lower in 2011, but could now translate into a technical foothold.

Weekly Chart of WAG since January 2012 With 10-Week Moving Average

While WAG's Relative Strength Index (RSI) of 74 suggests a short-term breather could be in the cards, a look at the stock's sentiment backdrop points to contrarian fuel in the tank. Currently, six out of 17 analysts maintain "hold" or worse opinions, leaving the door open for future upgrades to lure more buyers. Plus, the average 12-month price target of $47.05 is within a stone's throw of Walgreen's current price, meaning upward adjustments could also be on the horizon.

Elsewhere, an unwinding of bearish bets in the options pits could stoke the stock's flames. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 1.28 ranks in the 75th percentile of its annual range. In other words, option buyers have picked up WAG puts over calls at a much faster-than-usual clip during the past couple of weeks.

As such, the stock's Schaeffer's put/call open interest ratio (SOIR) stands at 2.02, indicating that puts more than double calls among options with a shelf-life of three months or less. Compared to similar readings of the past year, the SOIR ranks in the 94th percentile, suggesting short-term options traders have rarely been more put-heavy during the past 12 months.

Finally, short interest represents nearly four sessions' worth of pent-up buying demand, at Walgreen's average daily trading volume. As the stock extends its quest for new highs, a short-squeeze situation could amplify WAG's upward momentum.

Traders expecting higher highs for WAG should consider buying the stock's in-the-money July 39 calls, which were last asked at $7.55. In fact, the security's Schaeffer's Volatility Scorecard (SVS) of 93 implies that Walgreen Company options are very attractively priced right now, relative to the probability of an outsized move on the charts.


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