Options Bulls Turned Quick Profit on WBA Stock This Month

Short sellers may have had a hand in WBA's recent rally

by Karee Venema

Published on Nov 29, 2018 at 4:15 PM

Subscribers to our Weekend Trader service recently doubled their money with the Walgreens Boots Alliance Inc (NASDAQ:WBA) January 2019 72.50-strike call. We'll take a closer look at what initially put WBA stock on our bullish radar, and how the winning options trade unfolded.

When we entered the position on Monday, Oct. 29, the Dow stock had surged 29% off its late-June lows, eventually topping out near $78 in mid-October. Broad-market headwinds brought WBA shares back near their 20-day moving average and year-to-date breakeven point, which we believed would serve as support going forward.

Meanwhile, shorts were in covering mode -- and a continuation of this trend would likely create tailwinds for the equity. Specifically, short interest was down 26% from its early August peak, yet the 24.15 million shares that were sold short at that time represented four days' worth of pent-up buying demand, at the average pace of trading.

Upgrades were a possibility, too, with the majority of brokerages in coverage maintaining a "hold" or worse rating on WBA. Plus, short-term speculators were more put-heavy than usual, per the equity's top-heavy Schaeffer's put/call ratio (SOIR) of 1.06, in the 98th annual percentile. An unwinding of the hedges related to these near-term bets could translate into options-related support for a stock.

As expected Walgreens Boots Alliance bounced back sharply at the start of November, and has spent the month carving out a string of new highs. Short covering helped fuel the additional upside, with short interest falling an additional 4% over the Oct. 15-Nov. 15 reporting periods. WBA stock closed at $84.64 on Wednesday, Nov. 28, allowing call buyers to lock in a 101% profit in just five quick weeks.

wba stock chart nov 29

 

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