Breaking Down Our Huge Options Win on RH Stock

RH stock landed on our bullish radar after the company delivered promising preliminary results for its fourth quarter

Apr 27, 2017 at 11:30 AM
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Subscribers to Schaeffer's Leverage trading service recently enjoyed a 223% return thanks to RH April 27.50 calls. Below is a brief recap on how we came across RH stock, and how shares of the home furnishings retailer surged in the subsequent weeks. 

We recommended the RH 27.50 calls back on March 3 with the shares trading near $31, shortly after the company presented upbeat preliminary fourth-quarter results. This marked a potential change of pace for the stock, as earnings had disappointed in previous quarters. Tailwinds from the announcement had the shares forming a bull flag pattern just above their year-to-date breakeven level. We suspected the stock could resume its upside move after consolidating just above this key level. 

Considering the promising fundamental and technical developments, RH's huge short-interest levels also stood out. In fact, around 43% of the stock's float was controlled by short sellers at the time, representing an all-time high. A potential short-squeeze situation was another reason to be bullish. Meanwhile, it was also promising that the stock's Schaeffer's Volatility Index (SVI) was just 4 percentage points from an annual low, suggesting it was a good time to buy near-term options. 

Shares of RH saw a sharp uptick immediately after we recommended the calls, leading us to close half of our position on March 22. By doing so, we effectively reduced risk to breakeven, which allowed the staying power through earnings, letting the convexity of options work in our favor. On the other hand, someone who was long RH shares instead of calls may have had a hard time holding through the earnings report. 

After the company officially announced earnings on March 28, the stock once again gapped higher, and continued to rise in the following weeks, before we finally closed the final half of our position on April 21, with RH trading near $48. 

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