Is Harley-Davidson Stock Set for Another Post-Earnings Bear Gap?

Shorts could be hedging their bets as HOG prepares to report earnings

by Emma Duncan

Published on Oct 16, 2017 at 3:35 PM

Among the companies announcing third-quarter earnings this week is motorcycle giant Harley-Davidson Inc. (NYSE:HOG). Ahead of the Tuesday morning release, speculative players are active, with HOG option volume rising to nine times the norm today.

According to Trade-Alert, in fact, today's call volume on HOG of 14,542 contracts is pacing in the 98th percentile of its annual range. The most popular strike is HOG's November 47.50 call, where just over 5,000 contracts have been exchanged. With HOG shares fractionally lower at $46.61, these back-month calls are out of the money.

This skew toward calls continues a recent trend for Harley-Davidson stock. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) yields a 10-day call/put volume ratio of 1.57, which ranks in the 75th annual percentile. This indicates options traders have preferred calls over puts by a wider-than-usual margin during the past two weeks.

However, it's possible that some of these call buyers are actually HOG short sellers looking to hedge their bets ahead of earnings. Short interest accounts for nearly 13.5% of the stock's available float, representing 19.6 times HOG's average daily trading volume. By purchasing calls against their shorted Harley-Davidson shares, these bears can guard their stock positions against a potential post-earnings rally.

The options market is pricing in a daily post-earnings move of 10.1% for HOG, nearly double its average after-earnings move of 5.2% over the past eight quarters. The stock has traded lower in the session immediately following each of its last three quarterly reports, with every earnings report in 2017 so far resulting in a bear gap on HOG's daily chart.

From a broader perspective, Harley-Davidson stock has lost 20% year-to-date. Following the aforementioned post-earnings bear gap in April, the stock's 80-day moving average has served as resistance on a couple of rally attempts; meanwhile, the stock's current location, around its 20% year-to-date loss level, has provided support since July's post-earnings sell-off.

Daily Chart of HOG Since Jan 2017 with 80Day

After tomorrow's quarterly results, we could once again see some substantial volatility out of HOG shares. The high short interest-to-float ratio points to plenty of sideline cash for a short-covering rally in the event of a positive surprise -- but if HOG once again disappoints, emboldened bears could add to their bets against the stock.

And in either scenario, a change of heart among indecisive analysts could help fuel the stock's post-earnings momentum. Out of the 17 brokerage firms following Harley-Davidson, no fewer than 15 carry tepid "hold" ratings. 

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