Near-term HRL options are pricing in low volatility expectations at the moment
Spam producer Hormel Foods (NYSE:HRL) fell 5% in immediate aftermath of its late-August quarterly report, but quickly pivoted that same day and went on to gain more than 10% over the next few weeks. The stock is up 14.8% in 2018 and 36% year-over-year, with a recent pullback contained by its 40-day moving average. With the stock bouncing from this layer of support, it's time to make a bullish play on HRL.
Shorts have been heading for the exits since August. Short interest fell by 5.6% in the most recent reporting period, yet the 34.86 million shares sold short still represent nearly 13% of HRL's total available float, and 14.5 times the stock's average daily trading volume. A capitulation of the weaker bearish hands could continue to propel the stock higher.
Analysts have been hesitant to buy in. Of the 11 brokerages covering HRL, eight rate it a "hold" or "strong sell." Further, its consensus 12-month price target of $37.08 is an 11% discount to Friday's closing perch, indicating a round of upgrades and/or price-target hikes could serve as more tailwinds for the equity.
In the options pits, heavy accumulations of open interest at the October 42.50 call expired at the end of last week, which effectively clears a potential options-related roadblock from the stock's path higher. Meanwhile, the stock's Schaeffer's Volatility Index (SVI) of 21% sits in just the 25th annual percentile, revealing low volatility expectations are being priced into near-term contracts.
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