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Staples Bulls Look for Short-Term Earnings Pop

Front-month call activity spikes just before SPLS reports

by 5/15/2012 1:43 PM
Stocks quoted in this article:

The master of the easy button, Staples (SPLS - 14.95), is hoping to have an easy time of it tomorrow morning when the company reports first-quarter earnings. The consensus estimate is for per-share results of 30 cents, a two-cent improvement from the year-ago figure.

SPLS last reported on Feb. 29, beating analysts' estimates by a penny per share. The stock took a turn for the worse on news of a reduced forecast, however, and dropped more than 8% the day earnings hit the Street.

Option traders are hoping for a reversal of fortune this go-round, however, and are buying at-the-money calls with very limited time value. On Monday, nearly 20,000 calls traded at the May 15 strike, about 13,000 of which translated as new open interest. It appears the lion's share of these trades went off at the ask price, suggesting they were bought to open.

Some blocks of the May 15 call traded for $0.65, meaning SPLS will have to be trading above $15.65 (a 4.7% move) by Friday's expiration for the long call to be profitable. Above this point, profits are theoretically unlimited; losses, meanwhile, are capped at the premium paid to enter the long call.

Overall call volume was 10 times higher than normal on Monday while put volume came in six times above average. Midday Tuesday, call volume is already running 10 times higher than usual, while put volume is just double the norm. Today, it's the May 16 call that is seeing all the attention, with more than 12,000 calls trading on open interest of 13,000 (suggesting they could be opening or closing trades).

If SPLS were to surprise to the upside tomorrow morning and spur a rally in the shares, some short sellers may see it as their cue to exit. Currently, it would take more than six days (at the stock's average daily volume) to cover the 45.4 million shorted shares. Short interest has been on the rise since September, and the short-interest ratio has jumped to 6.2 from 2.8 since March.

From the bears' corner, however, SPLS has some challenges to press through. In addition to its most recent earnings legacy, SPLS is dealing with a weeks-long downtrend, which has taken the shares down more than 11% since late March.

The stock was recently unable to break above the $17 level, which marked the site of a May 2011 gap lower and could now represent intermediate-term resistance to the upside. This could prove a more powerful force than the 40-week (equivalent to a 200-day) moving average, which is flattening out around the $14.75 mark.

Staples weekly price chart
Chart courtesy of StockCharts.com


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