2 Retail Stocks Expected to Make Big Earnings Moves

Options traders are picking up JWN calls at a much faster-than-usual clip

by Emma Duncan

Published on Mar 1, 2018 at 10:03 AM
Updated on Jun 24, 2020 at 10:16 AM

Retail earnings have been in the spotlight this week, with Macy's (M) and Best Buy (BBY) among the companies scoring earnings wins. Today, we will look at Gap Inc (NYSE:GPS) and Nordstrom, Inc. (NYSE:JWN) stocks ahead of the retailers' earnings reports tonight, and how options traders are expecting much bigger-than-usual reactions this quarter.

Gap Surrounded By Pre-Earnings Skepticism

Gap stock touched a two-year high of $35.68 on Jan. 23, before pulling back with the broader equities market. However, the shares found a foothold atop their 80-day and 100-day moving averages. In fact, pullbacks to the former trendline have marked short-term buy signals for GPS in the past. Today, however, GPS stock is succumbing to broader headwinds, down 1.5% at $31.11.

Looking back eight quarters, Gap shares have averaged a one-day post-earnings move of 5% in either direction in the session after the company reports, but jumped an impressive 7% the day after its most recent earnings. For this particular quarterly report, the options market is pricing in a much larger-than-usual 10.3% move for Friday's trading, going by implied volatility (IV) data.

Despite GPS stock's gain of more than 38% in the past nine months, only two of the 19 analysts following the stock carry "buy" recommendations, which leaves ample room for more upgrades on another earnings win. Likewise, price-target hikes could be in store, as the average 12-month price target of $31.34 is within pennies of the equity's current perch.

Another solid earnings report could also frighten several shorts. Gap stock saw short interest grow nearly 28% in the most recent reporting period. It would take GPS bears a full week to buy back their positions, at the security's average daily trading volume -- which would be plenty of fuel for a short squeeze to send the retail stock higher.

JWN Shorts Could Be Seeking an Options Hedge

Nordstrom stock has rallied roughly 32% since touching an annual low of $37.79 in early November, and just notched a fresh two-year high of $54 on Feb. 23. At last check, JWN shares were down 2.1% at $50.22, testing round-number support.

Gearing towards earnings, JWN ended higher the day after earnings in four of the past six quarters, rallied 5.7% the day after its February 2017 report. Checking back on the last eight quarters, shares of Nordstrom averaged a post-earnings move of 6.2% in either direction in the session after the company reports. However, the options market is pricing in a larger-than-usual 10.6% move for Friday's trading, per IV data.

Digging deeper, traders have been leaning picking up calls at a rapid-fire rate. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows JWN with a 10-day call/put volume ratio of 4.96, ranking in the 94th percentile of its annual range. This suggests Nordstrom calls have been purchased over puts at a much faster-than-usual clip in the past two weeks.

However, considering JWN has rallied so hard off its November low, it's possible that some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to short sellers seeking an options hedge. Short interest represents nearly 16% of the stock's total available float, or roughly two weeks' worth of pent-up buying demand, at JWN's average pace of trading.

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