Options Traders Expect a Big Earnings Move From Fred's

FRED stock is up 68% year-to-date

Managing Editor
Sep 5, 2017 at 3:02 PM
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Retail and pharmacy concern Fred's, Inc. (NASDAQ:FRED) will report earnings on Wednesday morning. There have been some major misses for the retail sector during this earnings season, with sector peer Dollar General a victim last week. What's more, analysts, short sellers, and options traders have been rolling the dice on more downside for FRED stock after earnings, with the latter group expecting a bigger-than-usual earnings reaction.

FRED stock had a rough summer, weighed down by a negative earnings reaction in June, and the scrapped Walgreens and Rite-Aid merger, as Fred's had plans to buy over 1,000 Rite-Aid stores. Since then, FRED shares have underperformed the broader S&P 500 Index (SPX) by 48 percentage points during the past three months, and touched a 17-year low of $5.62 on Aug. 17. The retail stock is currently down 3.4% today to trade at $5.86, and has shed a whopping 68% this year. 

FRED stock has averaged a one-day move in either direction of 6.4% in the session following its last eight earnings releases, per Trade-Alert. While the stock suffered a 12% post-earnings dip back in June, and slipped 4.9% this time a year ago, it's reacted to the upside five of the last eight times. In anticipation of tomorrow, the options market is pricing in a much bigger-than-usual one-day swing of 20.3%, per the stock's at-the-money implied volatility data. 

Wall Street sentiment skews bearish on FRED. All six of the brokerages covering FRED stock rate it a "hold" or "strong sell." Also unsurprisingly, there remains a great amount of capital tied up in FRED short interest. While short interest decreased by 7% during the last reporting period, the 19 million shares currently sold short represent a whopping 72% of the stock's total available float. This accumulation represents more than 25 times Fred's average daily trading volume.

In the options pits, the pessimistic mood is also evident, despite light absolute volume. FRED stock's Schaeffer's put/call open interest ratio (SOIR) of 3.94 ranks in the 91st percentile of its annual range, suggesting options traders have rarely been as put-skewed during the past year, when looking at options set to expire in three months or less. Digging deeper, the deep in-the-money October 10 put is home to peak open interest, with over 14,600 contracts outstanding.

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