Traders Scoop Up Cheap Honeywell Call Options Ahead Of Earnings

HON options traders have been quick to buy calls in October

by Patrick Martin

Published on Oct 18, 2017 at 11:46 AM

Earnings season is in full swing. In addition to a number of Dow names and financial firms stepping up to the earnings plate, aerospace giant Honeywell International Inc. (NYSE:HON) is slated to unveil its quarterly results before Friday's open. Here's a closer look at how HON stock has been performing ahead of earnings, and how options traders are positioning themselves.

Honeywell stock has added 23.8% year-to-date with help from its 50-day moving average. The equity touched a record high of $145.30 on Oct. 9, but has since consolidated some of these gains, last seen down 0.1% to trade at $143.29.

The stock has historically performed well in the wake of Honeywell's earnings report, and over the past eight quarters, HON shares have moved higher the day after five times. On average, the equity has swung 1.8% in the subsequent session, regardless of direction, in line with what the options market is currently pricing in for Friday's trading.

Short sellers have been raising the bearish stakes recently. Short interest increased by 19% in the last reporting period to 8.51 million shares, the most since September 2015. Nevertheless, these bearish bets account for a slim 1.12% of the stock's available float.

Options traders, meanwhile, have been quicker-than-usual to buy calls over puts on the industrial stock in October. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), HON sports a 10-day call/put volume ratio of 4.46, which ranks in the 80th percentile of its annual range.

While some of this may be at the hands of vanilla options bulls, short sellers could also be initiating an options hedge against any additional upside risk. Regardless, now is an opportune time to buy short-term premium on the stock, considering its the Schaeffer's Volatility Index (SVI) stands at 14%, in the 13th percentile of its annual range. This indicates low volatility expectations are being priced into near-term options.

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