Five Below, Inc. (FIVE) Traders Gamble On Post-Earnings Upside

Five Below Inc (FIVE) traders are buying April and May calls

by Griffin Kruse

Published on Mar 20, 2015 at 1:13 PM
Updated on Apr 20, 2015 at 5:32 PM

While Deutsche Bank cut its price target on Five Below Inc (NASDAQ:FIVE) by $3 to $39, the stock is still following the broad-market trend higher today, up 1.9% at $31.96. Looking back, the security has been in recovery mode, up 12.2% since hitting a two-year low of $28.51 on March 10. What's more, call activity in the options pits has been ramping up ahead of next week's fourth-quarter earnings release, scheduled for Wednesday, March 25.

Drilling down, calls have been exchanging hands at 13 times the average rate today, and are outpacing puts by a nearly 13-to-1 ratio. Possible buy-to-open activity has been detected at the April and May 35 calls, which are today's two most active contracts overall. By purchasing these calls, traders expect the security to muscle north of the strike price by their respective expiration dates: April 17 and May 15. FIVE hasn't been north of $35 since mid-January.

Today's activity echoes recent sentiment in the options pits, as FIVE's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 4.96 ranks higher than 92% of all equivalent readings taken over the past year. However, short interest accounts for over 18% of the stock's available float, which would take nearly three weeks to cover, at average trading volumes. Against this backdrop, it's possible that the recent affinity for long calls -- particularly at out-of-the-money strikes -- could be attributable to short sellers seeking a pre-earnings hedge.

A majority of the brokerage bunch is bullish on Five Below Inc (NASDAQ:FIVE), as 75% of covering analysts rate the stock a "buy" or "strong buy," with no "sell" or worse recommendations to be found. Additionally, the stock's consensus 12-month price target of $41.69 stands at a 30.9% premium to current trading levels. Should the company once again miss earnings estimates last week -- FIVE dropped 12.2% in the session subsequent to reporting in December -- negative analyst notes could weigh on the shares.

Daily Chart of FIVE Since September 2014

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