Lowe's Options Traders Buy Calls Ahead Of Earnings

LOW shares are testing a key technical level

Managing Editor
Nov 20, 2017 at 1:25 PM
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Retailer earnings have been relatively well-received this quarter, with Abercrombie & Fitch (ANF) stock among the most recent winners. In addition, Home Depot (HD) stock charged to new heights last week after earnings, and next up in the earnings confessional is sector peer Lowe's Companies, Inc. (NYSE:LOW), which reports earnings before the open tomorrow. Here's a closer look at LOW stock's performance lately, and how options traders are playing the home improvement name ahead of earnings and Black Friday.

It's been a bumpy year for Lowe's stock, though the shares have added more than 15% since their August lows just north of $70 -- near LOW's year-to-date breakeven. At last check, the equity was up 1.8% to trade at $81.63, above the key $80-$81 area. This region represents a 61.8% Fibonacci retracement of LOW's 2017 high to its August lows, and briefly served as a level of support until the Republican tax plan sent home-building stocks lower earlier this month. Plus, this area acted as a floor for Lowe's shares back in March, after a massive earnings-induced bull gap.

Fib Levels LOW

The home improvement name has a choppy history of post-earnings price action. Lowe's shares have closed lower in the session subsequent to the company's earnings report in four of the past five quarters, including a 3.7% drop last August. The equity has averaged a one-day, post-earnings move of 3.8%, regardless of direction, over the last eight quarters. This time around, the options market is pricing in a one-day swing of 5.5%, based on the stock's at-the-money (ATM) implied volatility (IV) data.

As far as direction, it looks like options buyers are expecting a swing higher for LOW stock this time around. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), LOW sports a 10-day call/put volume ratio of 2.97, which ranks in the 74th percentile of its annual range. This indicates calls have been bought to open over puts at a faster-than-usual clip during the past two weeks.

Digging deeper, the December 82.50 call has seen the biggest open interest increase in the past two weeks, and now represents peak call open interest in the newly front-month series, with more than 6,300 contracts in residence. Buyers of the call expect Lowe's stock to topple the $82.50 level in the short term.

At last check, roughly 36,000 options have changed hands on LOW today -- four times what's typically seen at this point in the day, and volume pacing in the 96th annual percentile. Calls are slightly outnumbering puts, but the weekly 11/24 79-strike put is most active so far.

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