Earnings Preview: Lowe's Companies, Inc. (LOW)

Puts are running hot as Lowe's Companies, Inc. (LOW) prepares to report quarterly earnings

by Kirra Fedyszyn

Published on Aug 16, 2016 at 11:47 AM

DIY retailer Lowe's Companies, Inc. (NYSE:LOW) is due to report second-quarter earnings ahead of the open tomorrow, and shareholders will be hoping the company can top today's results from sector peer Home Depot Inc (NYSE:HD). The shares of LOW are currently off 0.2% at $81.42, but if past is precedent, the stock may be headed for a strong session tomorrow -- though that's not necessarily what options traders have been hoping for.

Puts have had a lead over calls in LOW's options pits of late. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.02 sits higher than 71% of the past year's readings. The preference for puts is even more pronounced among short-term strikes, as LOW's Schaeffer's put/call open interest ratio (SOIR) of 1.19 shows put open interest easily topping call open interest among options slated to expire in three months or less. Moreover, this reading sits just 5 percentage points from an annual high.

Today, LOW options are especially hot, trading at four times the typical intraday pace -- and puts have a lead once again. In fact, puts are outnumbering calls by a nearly 3-to-1 margin, with put volume running in the 99th percentile of its annual range, and put open interest already seated at a 12-month high. Most popular so far is the August 78 strike, where more than 4,500 contracts have changed hands. Buyers of the put are betting on shares of LOW to skid beneath the strike price by the close this Friday, when the front-month series expires, while put sellers are expecting the $78 level to act as a short-term floor.

Outside of the options pits, however, there is little pessimism to be found. Of the analysts tracking LOW, 70% maintain a "buy" or better rating, without a single "sell" in sight. And short interest fell by 31% during the last two-week reporting period, to represent less than 1% of the stock's available float.

History suggests that put buyers may be disappointed after tomorrow's earnings, provided they're not actually shareholders using options as protection. The stock has made a move to the upside in the session following earnings the past four quarters in a row. At present, the options market is pricing in a single-day post-earnings swing of 4.7% in either direction -- wider than the average move of 2.3% seen in the session subsequent to the company's last eight reports.

Technically, LOW has had a solid year in 2016, adding 7% so far, and tapping an all-time high of $83.65 in mid-July. The shares are still seated within striking distance of that level, with the underfoot 40-day moving average serving as support since May. Plus, should tomorrow's earnings report exceed expectations, an unwinding of bearish bets in the options pits could easily spur Lowe's Companies, Inc. (NYSE:LOW) on to new highs.

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