Big Party City Call Buy Ahead of Earnings

A big block of October 10 calls crossed earlier today

Karee Venema
May 8, 2019 at 2:23 PM
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Party City (NYSE:PRTY) is slated to report earnings before the market opens tomorrow, May 9. Ahead of the event, PRTY stock is trading up 4.1% at $7.32, heading toward its fifth straight win, and one speculator appears to be betting on -- or perhaps guarding against -- even more gains for the retailer.

With about two hours left in today's trading, more than 18,000 call options had traded on Party City -- 35 times what's typically seen at this point, and volume at a new annual high. By comparison, fewer than 100 puts are on the tape.

Most active by a mile is the October 10 call, due to a 9,900-contract block that was likely bought to open for an initial cash outlay of $495,000 (number of contracts * $0.50 premium paid * 100 shares per contract. If this is the case, breakeven for the call buyer is $10.50, or the strike plus the premium paid.

While this might be at the hands of a traditional bull, Trade-Alert suggests a short seller could be initiating an options hedge against any additional upside risk. Short interest on PRTY stock surged 7.6% in the most recent reporting period to a record 15.74 million shares. This represents a whopping 27.6% of the equity's float, or 9.5 times the average daily pace of trading.

Whatever the reason, the call buyer likely targeted the further-dated October series, considering front-month options are pricing in elevated volatility expectations ahead of earnings. At last check, PRTY's implied volatility term structure for the monthly May options was 124.2%, compared to 64.5% for October options.

Looking closer at the charts, Party City's recent win streak comes on the heels of the stock's May 2 record low of $6.28. The shares remain 26.3% lower on a year-to-date basis, and are struggling to overcome short-term resistance at their 20-day moving average. Meanwhile, the equity's two most recent earnings reactions have been negative, including a 15.4% plunge in February, though PRTY has finished higher the day after earnings six times in the last two years.

party city stock price chart may 8


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