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Staples, Inc. (NASDAQ:SPLS) was caught in the bearish trading crosshairs yesterday, just ahead of tomorrow morning's turn in the earnings confessional. Close to 3,600 puts were exchanged throughout the session, which was almost 10 times the security's average single-session put volume. By comparison, fewer than 600 calls switched hands. A closer look at the data shows that a number of traders are expecting the stock to fall below $16 -- a level not breached on a daily closing basis since early July -- over the next few weeks.
To be more specific, nearly 3,100 contracts crossed at the September 16 put on Monday at a volume-weighted average price (VWAP) of $0.51. The bulk of these puts traded at the ask price, suggesting they were bought. Meanwhile, open interest spiked by 2,066 contracts overnight, confirming the initiation of fresh bearish bets.
By purchasing the puts to open, speculators are wagering on SPLS to fall south of $15.49 (strike price less the VWAP) by front-month expiration. This would entail a drop of 7.2% from the stock's present perch at $16.70. At last check, the delta for this option stood at negative 0.33, implying it has a 33% chance of moving into the money ahead of the close on Sept. 20. However, even if the shares remain north of the $16 mark throughout the put's lifetime, the most Monday's bears stand to lose is the initial cash outlay. The traders could also be shareholders picking up protective puts to guard against a potential pullback of the security as earnings loom.
Although the office products giant has advanced around 46% year-to-date -- and tagged a new two-year high of $17.30 one week ago -- sentiment among options speculators has not been favorable toward SPLS. In fact, the equity sports a 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 2.24, indicating puts bought to open have more than doubled calls during the past 10 weeks. This ratio ranks in the 82nd annual percentile, meaning traders have been scooping up puts over calls at an accelerated clip. From a contrarian standpoint, an unwinding of these bearish bets could end up translating into options-related support down the road.
Further evidence of this skepticism lies in the fact that short interest rose by 3.4% during the most recent reporting period, and now accounts for a lofty 9.4% of SPLS' available float. It would take roughly 12 sessions to buy back these shorted shares, at the stock's average pace of trading. In other words, this ample amount of sideline cash is more than enough to fuel a short-covering rally, should the shares continue to climb higher.
As alluded to earlier, Staples, Inc. (NASDAQ:SPLS) is on tap to reveal quarterly earnings prior to tomorrow's opening bell, and has bested or matched consensus bottom-line estimates in five of the past seven quarters. For the second quarter, analysts are forecasting a profit of 18 cents per share.