Wayfair Stock Hit with Big Downgrade Ahead of Earnings

Short interest keeps rising on Wayfair

Managing Editor
Apr 30, 2018 at 9:28 AM
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Shares of online furniture retailer Wayfair Inc (NYSE:W) are sharply lower in early trading, after receiving a downgrade to "neutral" from "outperform" at Wedbush, along with a drastic price-target cut to $63 from $90 -- though this is still more than double Citron Research's price target. Wayfair stock was down 4.5% at $63.64 at last check.

W has been unimpressive on the charts, down more than 17% year-to-date coming into today, due in large part to a post-earnings bear gap in February. The shares' most recent breakout attempt was stopped cold just below the $75 level, where the 50- and 200-day moving averages reside. The company will get a chance to redeem itself, however, with earnings due out before the open this Wednesday.

Despite its lackluster price action, options traders have been quite bullish toward the stock ahead of earnings. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the security with a 10-day call/put volume ratio of 1.36, ranking in the 81st percentile of its annual range. This suggests calls have been purchased over puts at a faster-than-usual clip over the past two weeks.

However, it's likely that at least part of this call activity is from short sellers hedging against a sharp upside move. Short interest on W rose 30% during the past two reporting periods alone, and now represents almost 28% of the stock's total available float. At  the equity's average daily trading volume, it would take two weeks for shorts to cover their bearish bets. 

Either way, it's worth noting that Wayfair has handily rewarded premium buyers over the past year. The e-tailer currently sports a Schaeffer's Volatility Scorecard (SVS) of 83 out of 100. This means the equity has tended to register bigger price swings than its options premiums have priced in over the past 12 months.


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