Dick's Sporting Goods Options Traders Brace for a Volatility Crush

DKS stock has a recent history of negative earnings reactions

Mar 12, 2018 at 2:22 PM
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Retail earnings have been in the spotlight in recent weeks, and Dick's Sporting Goods, Inc. (NYSE:DKS) is next to take the mic, with its results slated for release before tomorrow's open. Ahead of the event, DKS stock was trading up 2.8% at $32.77, but the shares are running into potential technical resistance, and given their history of negative earnings reactions, today's rally could be short-lived.

Looking closer at the charts, DKS has struggled over the past year, down 32.8%. More recently, the retail stock has recovered from its Nov. 1 seven-year low of $23.88, but is now staring up at the key $33-$34 region, home to a 23.6% Fibonacci retracement of the equity's retreat from its 2016 high to its 2017 low and last August's pre-bear gap lows. Plus, this region kept a tight lid on Dick's Sporting Goods shares during a mid-February breakout attempt, and earlier today, the stock topped out at $33.83.

dks stock daily chart march 12

These long-term losses could accelerate should DKS get hit by another post-earnings slump. The stock has closed lower in the session after the retailer reported in each of the past five quarters, averaging a loss of 11%. This time around, the options market is pricing in a next-day move of 15.6%, regardless of direction. A move of this magnitude to the downside would send Dick's Sporting Goods south of $30 for the first time since early February.

Short-term options traders are exceptionally put-biased toward the stock, based on its Schaeffer's put/call open interest ratio (SOIR) of 2.99, which ranks in the 89th annual percentile. And while put buyers have been more active than usual per DKS' 10-day put/call volume ratio of 2.02 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- in the 90th percentile of its annual range -- premium sellers have been present, too.

Specifically, the equity's March 25 put is home to peak open interest of 91,098. Data from the major options exchanges confirms almost all of the positions were sold to open here back on Feb. 26. If this is the case, the put writers are hoping to profit off a post-earnings volatility crush, which will allow them to buy back the options at a cheaper price than they sold them for.

Outside of the options pits, analysts have remained stubbornly optimistic toward DKS shares. Of the 22 brokerages covering the stock, nine continue to maintain a "strong buy" recommendation. Another negative earnings reactions could spark a round of downgrades, possibly creating even bigger headwinds for the retail shares.

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