This Retail Stock Could Break Out After Earnings

Options traders appear bullish on ROST ahead of earnings

Managing Editor
Nov 15, 2017 at 1:15 PM
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Retailer Ross Stores, Inc. (NASDAQ:ROST) will report third-quarter earnings after the close tomorrow. While sector peer Foot Locker (FL) hopes to buck its ugly post-earnings trend, Ross Stores would like to see a repeat of its recent earnings reactions. What's more, ROST shares tend to outperform during the week of Thanksgiving. Below, we will examine Ross Stores' earnings trends and how options traders are positioning themselves with the retail stock.

At last check, ROST stock was up 1.5% to trade at $65.43. The stock has rallied 20% during the last three months, enjoying a pair of bull gaps since touching an annual low of $52.85 on Aug. 15. Since the most recent gap higher in late September -- courtesy of an analyst upgrade -- the shares have found support atop their 320-day moving average. Lately, however, the $65-$66 region -- which acted as a floor for ROST in late 2016 and early 2017 -- has served as stiff resistance.

ROST stock chart

Historically speaking, the stock's post-earnings reactions have tended to be outstanding, with ROST closing higher the next day in six out of the last eight quarters -- including a 10.7% boost in August, and a 3.8% gain a year ago in November. On average, ROST stock has posted a single-day swing of 5.1% the day after its last eight earnings, regardless of direction.

This time around, the options market is pricing in a much bigger 8% move for Friday's trading, per at-the-money implied volatility data. Should ROST move 8% to the upside, it would put the shares north of $70.50 -- in all-time-high territory.

As alluded to earlier, ROST stock also tends to outperform during the holiday-shortened Thanksgiving week. The retailer is among the best stocks to own next week, if past is prologue, ending the week higher nine of the last 10 years. Further, Ross Stores shares have averaged a 2.84% gain during Thanksgiving week, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

In the options pits, call buying has dominated the picture, as evidenced by the equity's 10-day call/put volume ratio of 7.88 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio is at its highest point since June 2016. In other words, options traders bought to open ROST calls relative to puts at a much faster-than-usual clip during the past two weeks.
Digging deeper, the December 65 call has seen the biggest open interest accumulations during the past two weeks. According to Trade-Alert, most of that action happened yesterday, when a sweep of more than 2,500 calls were likely bought to open for $2.20. In order to make money on the trade, the speculator needs ROST shares to topple $67.20 (strike plus premium paid) by the close on Friday, Dec. 15, when the options expire.

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