Earnings in store

“Unusual” options activity before an earnings release is far from unusual, since the uncertainty of these events may cause some traders to use options to hedge existing positions, and others to establish new trades based on how they think the stock will react.

So, while higher-than-average call or put volume won’t necessarily indicate whether traders and investors are feeling particularly bullish or bearish before an announcement, certain positions may stand out more than others.

On Tuesday, for example, put options volume in retailer Dick’s Sporting Goods (DKS)—which is scheduled to release earnings before the opening bell on Thursday—was roughly 19 times average, and was also around 19 times call volume. The two biggest positions were 2,800-contract trades in the March $180 and $200 calls expiring a week from Friday:

In addition to the fact that, on average, call volume outpaces put volume on any given day, this activity may have grabbed the attention of some traders because it 1) had a short-term time horizon, and 2) appeared to represent a trader entering new positions rather than exiting existing ones (by virtue of the volume being greater than the open interest).

If we assume the positions were established because of the immiment earnings release, the question then becomes, what was the trader looking to accomplish? With the caveat that this is always an impossible question to answer with certainty, we can make educated guesses. The following chart shows DKS was trading a little below $200 around midday on Tuesday (it pulled back later to close down on the day):

That means the $200 put was roughly at the money (ATM), while the $180 put was around $20 out of the money (OTM). Same-sized trades in ATM and OTM puts could mean Tuesday’s activity represented a single position—specifically, a vertical (bear) put spread, which would mean the trader bought the $200 puts and simultaneously sold the $180 puts. The position’s risk profile reveals it’s a limited-risk, limited-reward trade:

The trade’s loss is limited to the cost of the spread—the premium taken in from selling the short put minus the premium paid for the long put (in this case, around $8). The maximum potential profit is the difference between the strike prices (in this case, $20), minus the cost of the spread, which would occur if the stock settled at or below the short option’s strike price at expiration. No matter how high the stock rallies or falls, the position’s gain or loss is capped at these respective levels.

There are many explanations for Tuesday’s options activity—and today’s trades could alter perceptions of that activity—but a large bear-put spread executed in soon-to-expire options two days before an earnings announcement could mean a trader or investor was anticipating at least a measure of short-term volatility in the stock.

If that’s the case, we’ll soon know whether the trader was correct.

Today’s numbers include (all times ET): Consumer Price Index (8:30 a.m.).

Today’s earnings include (all times ET): Campbell's (CPB), Descartes Systems Group Inc (DSGX), G-III Apparel (GIII), UiPath (PATH).

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