Dick's Sporting Goods Stock Flashes 'Buy' Signal Before Q1 Report

DKS options are attractively priced, even with earnings out soon

by Patrick Martin

Published on May 10, 2018 at 1:47 PM

The retail sector has been in focus lately, although more so for its struggles than successes. Sports retailer Dick's Sporting Goods Inc (NYSE:DKS) has had a roller coaster year thus far, as well. Although the stock has added 8% in 2018, it has recently pulled back to 160-day moving average. Based on previous returns, and with earnings due out before the open next Monday, now may be the time to trade the DKS pullback.

Over the past three years, there have been three occasions where DKS has pulled back to within one standard deviation of its 160-day moving average after an extended stint above this trendline, according to Schaeffer's Senior Quantitative Analyst Rocky White. One month after testing its this trendline, the security was higher two-thirds of the time, and sported an average return of 4.81%.

Pullbacks DKS

This time around, the bounce from its 160-day moving average could be either accelerated or offset by a strong post-earnings reaction. Unfortunately, the stock has closed lower in the session after earnings in five of the past six quarters, averaging a swing of 9%. This time around, the options market is pricing in a much larger next-day move of 14.3%, regardless of direction, based on implied volatility data.

Should Dick's stock rally, a short squeeze could be in play. Short interest fell by 10% in the most recent reporting period, yet the 10.42 million shares still represent 13% of the total available float and exactly one week of pent-up buying power, at the average pace of trading. 

Meanwhile, options traders are exceptionally put-biased, based on DKS' 10-day put/call volume ratio of 2.15 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- in the 82nd percentile of its annual range. In other words, DKS options buyers have been initiating bearish bets over bullish at a faster-than-usual pace during the past two weeks.

Despite the upcoming earnings report, short-term options on the retail stock are surprisingly cheap. Specifically, its Schaeffer's Volatility Index (SVI) of 42% ranks in the 20th percentile of its annual range, as front-month at-the-money options have priced in lower volatility expectations only 20% of the time over the past year.


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