Tipping the options scale
08/08/18

If dollars were pounds (the mass kind, not the currency kind), diet/fitness company Weight Watchers (WTW) went on a successful crash diet yesterday, shedding around $13 (14%) after releasing the following quarterly performance numbers after Monday’s close:

●Earnings: $1.01 (vs. $0.88 estimate)

●Revenues: $409.7 million (vs. $409.55 million estimate)

The company raised its forward guidance for the year, to boot.1

These results don’t necessarily represent blockbuster outperformance, but a beat is a beat, after all. What’s the scoop?

Hard to say, although one blemish in the under-the-hood numbers was a 2.2% decline in subscribers from Q1 to Q2. But on the other hand, subscriptions were up year-over-year.2

Weight Watchers (WTW), 9/18/18 – 8/7/18. Weight Watchers (WTW) daily price chart. Post-earnings declines.

Source: OptionsHouse


The daily chart above, however, shows WTW is no stranger to post-earnings declines, albeit not necessarily on the same scale as yesterday’s. The stock was flat to lower one week after the three previous earnings releases marked on the chart (May 3, February 27, and November 6), a short-term bearish tendency that is evident in WTW’s longer-term history of quarterly announcements.3

The following LiveAction scan shows WTW put options volume was inflated yesterday, running more than four times the daily average:

Unusual put options volume, 8/7/18. Busy day in puts.

Source: OptionsHouse


Now, since every option trade has a buyer and a seller, it’s difficult to determine whether such an increase in put volume is more of a sign of bullishness (short sellers betting on a stock rebound) or bearishness (buyers betting on a continued stock decline). But one thing to keep in mind is the tendency for sharp down moves to inflate the put option premiums more than up moves tend to inflate call premiums.

For example, around 12:15 p.m. ET yesterday when WTW shares were trading around $79.50, $70 puts expiring on September 14 were $1.05 bid, $1.25 offer (+$0.38 from the previous day); $75 puts were $2.10 bid, $2.60 offer (+$0.43 from the day before). In other words, put option premiums were pumped up, making them potentially attractive for shorting, especially for traders expecting WTW to rebound (or even move sideways) in the next few days or weeks.

All things considered, there’s an argument to be made that savvy traders were taking the opportunity to collect inflated put options premium at the expense of investors who wanted to hedge their long WTW stock positions or buy puts to speculate on a further decline in the stock.

Profit-loss profile, WTW $70 put option. Collecting premium.

Source: OptionsHouse


The chart above shows a risk-reward profile created in OptionsHouse for shorting a September 14 $70 put option at $1.20. Traders who didn’t want to get assigned stock would want to select a strike price they believed the stock was unlikely to reach over the course of the options life. In this case, $70 would represent another 13.5% decline from where WTW was trading midday yesterday.

Now traders will have to wait and see whether WTW will put some meat back on its bones.

Market Mover Update: Since the July 30 low noted in “It’s all relative—strength, that is,” the Nasdaq 100 (NDX) had rallied around 4% as of yesterday—approximately twice as much as the S&P 500 (SPX) or the Russell 2000 (RUT).

No one can be sure when the next shot will be fired in the tariff wars, but the SPX has rallied for three more days and another 1.3% since the White House’s August 1 tariff threat (see “Tariff tantrums, trading ops?”). The index is now less than 0.5% from its record high.

Finally, while SodaStream (SODA) kept fizzing to the upside yesterday, tacking on another 5%-plus, PepsiCo (PEP) went in the opposite direction, falling more than 2% to the lower end of the trading range it broke out of on Monday (see “Soda pops”). Side note: A LiveAction scan showed SODA had unusually high put options volume (nearly three times its daily average) again yesterday.

 

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1 StreetInsider.com. Weight Watchers (WTW) Tops Q2 EPS by 13c, Revenues Slightly Beat; Boosts FY18 EPS Outlook. 8/6/18.

2 TheStreet.com. Weight Watchers' Stock Is Tanking After Another Plump Quarter for Profits. 8/7/18.

3 StreetInsider.com. Weight Watchers International, Inc. (WTW) Earnings. 8/7/18.