Options Traders Anticipate an Earnings Breakout for Lowe's Stock

Home improvement retailer Lowe's Companies, Inc. (NYSE:LOW) reports earnings before the open tomorrow, and expectations appear bullish. For starters, call volume is outpacing put volume today, running at two times the pace expected, good enough to land in the 92nd percentile of its annual range. The bulk of the action has taken place at the weekly 8/25 79-strike call, and data points to buy-to-open activity. If this is the case, these options bulls expect LOW stock to rally nearly 5% by the end of the week and take out the $79 level by Friday's close, when the options expire. 

This matches recent activity in Lowe's options pits. Specifically, the 71-, 74-, and 77.50-strike calls from the same weekly 8/25 series rank among the top 10 contracts that saw the largest increases in open interest during the past two weeks. The stock now has a Schaeffer's put/call open interest (SOIR) of 0.24, ranking just 8 percentage points from an annual low. This confirms the idea that near-term options traders are unusually call-skewed. 

Of course, volatility expectations are ramping up ahead of the quarterly event, evidenced by the equity's 30-day at-the-money implied volatility. Today's reading of 28.3% sits just 5 percentage points from a 52-week high, so traders will need to pay up if they want short-term options contracts. 

Overall, the options market is pricing in an 8% swing for LOW in tomorrow's session, which is more than two times its average post-earnings swing over the past eight quarters. Zeroing in on the retailer's four most recent earnings releases, the stock has moved lower in the subsequent session three times, including a 3% drop last quarter. 

Meanwhile, plenty of analysts remain upbeat, with half those in covering recommending to buy the shares. At the same time, short sellers have been hitting the exits, evidenced by a 22.3% decline over the two most recent reporting periods. 

Lowe's stock has pulled back some since its record high of $86.25 from May 9, now sitting 3% lower on a year-over-year basis, last seen trading at $75.07. But this pullback has so far been contained by LOW's 36-month moving average, a trendline that's acted as strong support in the past. Plus, the equity has historically outperformed in the second half of the year.