Options Players Buzzing Ahead of Nordstrom, Inc. (JWN) Earnings

Options players are placing bets ahead of earnings from high-end retailer Nordstrom, Inc. (NYSE:JWN)

Aug 10, 2016 at 12:27 PM
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As earnings season trudges on, retail stocks once again seem to be struggling, including luxury retailers such as Michael Kors Holdings Ltd (NYSE:KORS) and Coach Inc (NYSE:COH). However, the shares of high-end department store Nordstrom, Inc. (NYSE:JWN) are higher today -- up 3.4% at $44.96 -- and options traders are circling ahead of tomorrow night's earnings release.

JWN has added 28.5% since hitting a four-year low of $35.01 in late June. However, the stock is now running into a potential speed bump in the $45-$46 area -- where the shares were trading prior to their post-earnings bear gap in May, and home to JWN's descending 32-week trendline, which contained rebound attempts earlier this year. Plus, the $46 neighborhood is home to a 61.8% Fibonacci retracement of JWN's rally from August 2010 to August 2015.

160810JWN

In the options pits, calls are crossing the tape at roughly 12 times their average intraday rate -- and volume is on pace for an annual high -- with most of the action attributable to what appears to be a bullish roll. Specifically, it looks like one speculator may be selling to close thousands of September 45 calls in order to buy higher-strike September 50 calls. JWN hasn't been north of the mid-century mark since early May.

Meanwhile, JWN puts are trading at almost twice their usual rate. JWN's most active strike is its August 42.50 put, with what appears to be mostly buy-to-open action. This indicates the option players are anticipating a fall back below the $42.50 level before next Friday's expiration -- or a decrease of more than 5.5% off JWN's currently level. Over the past eight quarters, Nordstrom, Inc. (NYSE:JWN) has averaged a one-day post-earnings move of 6.6%, and has suffered a drop in the subsequent session over the past three quarters.

From a longer-term perspective, Nordstrom, Inc.'s 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) of 4.00 currently sits in the 91st percentile of its annual range, showing a higher-than-usual bullish bias towards the retailer in recent weeks. JWN's Schaeffer's put/call open interest ratio (SOIR) of 0.58 also shows a higher-than-usual appetite for calls among near-term traders, sitting lower than 93% of all other readings from the past 12 months.

However, it's worth noting that short interest in JWN has gone up by more than 10% over the last two reporting periods, and accounts for a lofty 35.6% of JWN's float. This would take traders over 12 days to cover, at JWN's average daily volume. Against this backdrop, it's possible that some of the recent call buyers are short sellers seeking a pre-earnings options hedge.

Whatever their motive, near-term traders are paying a premium for JWN options, with the stock's Schaeffer's Volatility Index (SVI) of 67% sitting in the top quartile of its annual range, suggesting traders are pricing in relatively lofty volatility expectations. Given Nordstrom, Inc.'s (NYSE:JWN) relatively high Schaeffer's Volatility Scorecard (SVS) of 77, this might be money well spent, since JWN has tended to exceed volatility expectations during the past year. 

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