RH Stock Nears Record High Ahead of Earnings

RH shorts may be seeking an options hedge ahead of the company's earnings

Managing Editor
Aug 31, 2018 at 10:22 AM
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Shares of RH (NYSE:RH) are up 1% at $158.51 this morning, with the company gearing up for its second-quarter earnings report, slated for release after the market closes this Tuesday, Sept. 4. Below we will take a look at how RH -- formerly Restoration Hardware -- has been faring on the charts, and also dive into what the options market is expecting for the stock's post-earnings move.

RH has been a long-term outperformer, soaring over 500% from its early 2017 low of $24.41. From a more recent perspective, the retailer saw an impressive post-earnings bull gap on June 12, which sent its shares to a record peak of $164.49. Further, RH currently boasts an 83% year-to-date lead, with a line of support stemming from the rising 50-day moving average.

Daily Chart of RH with 50MA

Looking at the stock's earnings history, RH has closed higher the day after the company reported in four of the past eight quarters, including the last two in a row. The reactions have been volatile, as evidenced by the 30.5% surge on June 12 , with the shares averaging an 18.9% move the day after earnings over the last two years, regardless of direction. This time around, the options market is pricing in a 15.1% move for Wednesday's trading.

Options traders appear to be positioning for another post-earnings move to the upside. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), RH's 10-day call/put volume ratio of 1.88 ranks in the 78th annual percentile, meaning calls have been bought to open over puts at a quicker-than-usual clip.

However, some of this recent surge in call buying could be attributable to RH shorts seeking an options hedge before earnings. Short interest accounts for 43.5% of the stock's total available float, and at the retailer's average pace of trading, it would take shorts nearly 14 days to buy back their bearish bets.

Lastly, analyst sentiment on RH has been heavily pessimistic. Of the 15 firms covering the home furnishings retailer, 11 sport tepid "hold" or worse ratings. Plus, the stock's average 12-month price target comes in at $150.06 -- a 5% discount to current trading levels. Should the shares continue to move higher, a round of short covering or bullish brokerage notes could create tailwinds.

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