Pre-Earnings Options Traders Take Aim at Dick's Sporting Goods

Both call and put buyers have been active in Dick's Sporting Goods Inc's (NYSE:DKS) options pits

Mar 6, 2017 at 10:52 AM
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Retail earnings will be in focus this week, with Dick's Sporting Goods Inc (NYSE:DKS) just one of many names set to report. Specifically, DKS will unveil its fourth-quarter earnings report ahead of tomorrow's open, and options traders have been busy in the weeks leading up to the event. Per data from Schaeffer's Senior Quantitative Analyst Rocky White, shares of DKS have seen some of the heaviest options volume among S&P MidCap 400 Index (MID) stocks, with 32,787 puts traded in the past 10 sessions, compared to 22,927 calls.

Plus, put and call open interest for DKS are docked in the 99th and 96th annual percentiles, with a respective 118,484 and 53,504 contracts outstanding, while the stock's Schaeffer's put/call open interest ratio (SOIR) is perched at a top-heavy 2.28 -- in the 77th percentile of its annual range. In other words, speculators are more put-heavy than usual among options set to expire in three months or less.

Drilling down, DKS' March 45 and 49 puts have seen the most action over the last two weeks, due to what appears to be a 2:1 put ratio spread that was initiated on Friday, Feb. 17. If this is the case -- as Trade-Alert indicates -- the goal is for the stock to retreat to $49 by the time the front-month options expire at the close on Friday, March 17. While the two sold puts lowered the cost of entry for the spread strategist, they also increased the risk, as the extra sold put opens the trader up to potentially unlimited losses.

Elsewhere in the options arena, DKS speculators have been busy buying to open calls relative to puts at a faster-than-usual pace. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 3.45 ranks higher than 86% of all comparable readings taken in the past year.

While some of this recent burst of call buying is likely a result of "vanilla" option bulls, it's also possible that DKS short sellers are hedging their bearish bets against any post-earnings upside. In fact, the stock is heavily shorted, with short interest up 50.6% in the two most recent reporting periods to 8.4 million shares -- the most since mid-June.

Regardless of the motive, the options market is pricing in high volatility expectations ahead of earnings. Not only does the stock's Schaeffer's Volatility Index (SVI) of 56% rank above 77% of all comparable readings taken in the past year, its 30-day at-the-money implied volatility of 53.3% is docked at an annual high.

Looking back over the past eight quarters, DKS stock has moved to the upside in the session subsequent to the retailer's earnings report five times. On average, the shares have swung 5.2%, regardless of direction, with the options market expecting an even bigger 11.7% move in tomorrow's trading. A positive post-earnings reaction would only extend the stock's recent bounce off the $48-$49 region, home to its 320-day moving average and a 61.8% Fibonacci retracement of DKS' June-to-September rally. Longer term, shares of Dick's Sporting Goods Inc (NYSE:DKS) have climbed more than 17% year-over-year to trade at $52.01.

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