Bet On a Weight Watchers Stock Bounce With Call Options

Weight Watchers has shed almost 20% so far in August

Karee Venema
Aug 20, 2018 at 12:20 PM
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It's been a rough month for Weight Watchers International, Inc. (NYSE:WTW), which is down nearly 20% so far in August on a negative earnings reaction and news the company's top investor trimmed its stake. However, the Oprah-backed stock is now trading near a trendline that's had bullish implications in the past -- suggesting WTW shares could be ready to bounce.

wtw stock daily chart aug 20

Specifically, WTW stock is now trading within one standard deviation of its 200-day moving average. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been three other times since 2015 that Weight Watchers has pulled back to this trendline after a lengthy stint above it, resulting in an average five-day return of 7.78%, with two-thirds of the returns positive.

Broadening the time frame to one month later, WTW was higher each time, averaging a gain of 16.1%. Based on its current perch at $72.81 -- up 3.5% today, on track to snap its three-day losing streak -- another rally of this magnitude would put the security back above $84.50.

There's plenty of sideline cash to fuel a big bounce, too. Short sellers, for instance, have been in covering mode recently, with these bearish bets declining roughly 28% between the April 1 and Aug. 1 reporting periods -- a stretch that saw WTW surge almost 41%. The 4.34 million shares still sold short represents almost four days' worth of pent-up buying demand, at Weight Watchers stock's average pace of trading.

Those wanting to bet on a repeat of history for WTW stock may want to consider an options buying strategy. Trade-Alert last pegged the equity's 30-day at-the-money implied volatility at 38.3%, registering in the 10th annual percentile. This means that short-term options are pricing in low volatility expectations at the moment.

What's more, Weight Watchers has consistently been one of the best stocks for premium buyers over the last year, per its elevated Schaeffer's Volatility Scorecard (SVS) reading of 79 out of a possible 100. In other words, WTW has tended to make outsized moves in the past 12 months, relative to what the options market was anticipating.


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