Pre-Earnings Options Traders Pay Up to Trade DSW Stock

DSW shares are still catching heat from Foot Locker's earnings

Aug 21, 2017 at 3:17 PM
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Wall Street has been blasted with retail earnings in recent weeks, with shoe peddler DSW Inc. (NYSE:DSW) set to take its turn in the earnings confessional bright and early tomorrow. Although DSW stock is still facing headwinds from Foot Locker's post-earnings plunge on Friday -- last seen down 1.1% at $15.67, and fresh off a six-year low of $15.15 -- options volume is accelerated, with most of the action happening on the call side of the aisle.

At last glance, 6,181 calls and 1,810 puts had traded -- nine times what's typically seen at this point in the day, and options volume on track to settle in the 99th annual percentile. Most active are the September 15 and October 17.50 calls, where it seems safe to assume new positions are being purchased. In other words, traders expect DSW to settle north of the strikes at the close on Friday, Sept. 15, and Friday, Oct. 20, respectively.

More broadly, it's been put buyers who have been busy in DSW's options pits in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.25 ranks in the 73rd annual percentile, meaning puts have been bought to open over calls at a faster-than-usual clip.

Regardless of whether options traders are targeting calls or puts, it's an expensive time to purchase premium on DSW. While the security's Schaeffer's Volatility Index (SVI) of 62% ranks above 70% of all comparable readings taken in the past year, its 30-day at-the-money implied volatility of 65.4% is in the 100th annual percentile. In other words, elevated volatility expectations are being priced into short-term options.

Looking back over the past five quarters, DSW shares have gapped notably lower in the session subsequent to reporting three times -- averaging a loss of 10%. This time around, the options market is expecting a 15.6% swing in tomorrow's trading, regardless of direction.

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