Lowe’s (NYSE: LOW, 58.35) has been building investor portfolio’s in 2014, with shares up over 17% year to date. The stock has traded in a 52-week range of $44.13-$59.16, having made a new high in Monday’s session.
Lowe’s quarterly earnings report is scheduled for Wednesday morning before market open, with consensus analyst estimates calling for EPS of $0.58 on revenues of $13.55 billion. For the same quarter one year prior, Lowe’s beat analyst estimates by $0.01 with EPS of $0.48 on $12.96 billion in sales.
The Set Up
LOW offers no serial options; however, standard November contracts have three days left until expiration Friday, and are thus trading in the same manner as weeklies would. The LOW Nov 60 Straddle is trading at $2.64-$2.82, implying a move of about 4.7%. LOW has moved an average of 4.2% over the last eight quarters on earnings news, with the options market forecasting an above average move for this quarter’s announcement. LOW has rallied on two of the past four earnings announcements, and four of the past eight.
Home Depot (NYSE: HD, 96.95) sold off following a strong earnings report after concerns were raised on the call over litigation costs following the company’s recent credit-card-data breach. It is reasonable to expect Lowe’s to report similarly strong numbers without the associated legal costs, so I will look to play LOW to the long side.
The Trade
- Buy the Nov LOW 60-62.5 Call Spread for $0.50
- Risk: $50 per 1 Lot
- Reward: Up to $200 per 1 Lot
- Break-even stock price at expiration: $60.50
This trade is somewhat aggressive due to the fact the strikes are $2.50 wide (remember, these are Nov serial contracts, not weeklies) and this sets up somewhat past the upside measured-move target (about $61.25). However, the trade does have the potential to pay 4:1 on my money and thus offers a favorable risk reward setup
The Greeks
#####
