Pre-Earnings Bears Blitz Advance Auto Parts

Put buying has been popular on AAP in recent weeks

Nov 11, 2019 at 3:10 PM
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Advance Auto Parts, Inc. (NYSE:AAP) is slated to report third-quarter earnings before the market opens tomorrow, Nov. 12. Put volume is running fast ahead of the event, with nearly 6,200 contracts traded so far -- 30 times what's typically seen at this point, and more than double the number of calls on the tape.

Most active are the November 145 and 160 puts, which expire at the close this Friday, Nov. 15. Specifically, it looks like one speculator sold 1,500 of the lower-strike puts for 40 cents apiece, while simultaneously buying the same amount of the higher-strike puts for $2.60, suggesting a long put spread was initiated for $330,000 (number of contracts * $2.20 premium paid per spread * 100 shares).

By combining the sold put with the bought one, the trader has effectively lowered their cost of entry, while also lifting their breakeven point to $157.80 (bought strike less net debit). Had the bearish trader just bought the 160-strike put outright, AAP would need to breach $157.40 (strike less $2.60 premium paid) for profits to begin adding up. However, they've also limited their profit to $12.80 per spread (difference between the two strikes, less the net debit), no matter how far Advance Auto Parts falls by week's end.

Bearish betting has been ramping up in AAP's options pits in recent weeks. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.40 ranks in the 73rd annual percentile, meaning puts have been bought to open over calls at an accelerated clip.

While some of this activity could be at the hands of traditional options bears, it's also possible shareholders are initiating an options hedge to guard against any downside risk. AAP stock is up 30% since its mid-August 14-month low of $130.09. The shares are struggling to break out above $171, site of their late-May peak. Today, the security is 0.7% higher at $168.63.

Historically speaking, AAP tends to do well in the session subsequent to the company's earnings report, having closed higher in six of the last eight quarters. On average, Advance Auto Parts stock moves 6.4% the day after earnings, regardless of direction, with the options market pricing in a bigger 11% swing for tomorrow's trading.

aap stock daily price chart on nov 11

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