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Retail stocks are keeping earnings traders fairly busy as one of the two themes happening this week; the other theme being solar names in the alternative energy group. One headliner in the not-too-distant future of this evening and likely to make waves during Thursday's session is Sears Holding (SHLD). In front of the release, Street estimates peg earnings to come in with a loss of -$1.09 versus last year's -$0.90 and last quarter's -$0.17 per share.

Losses aside, Sears Holdings have come a long way from a price of $66 in late August when Barron's featured its cover story "Trouble at Sears." On the heels of a large 12% stock plummet related to a disappointing quarterly loss, the financial weekly emphasized "disastrous" results for the company since famed hedge fund operator Eddie Lampert took the helm.

The article went on to say that "extreme cost-cutting" sorely backfired and the department store chain could "no longer generate the cash flow to mount a turnaround or attempt to borrow aggressively enough to afford a revival." As much and as approached by this writer's own coverage at the time, Barron's estimated shares of SHLD could see shares slide into the low 30's based on its problems.

Apparently the periodical's readership and influence has slipped or investors have optimistically done the homework themselves and see things differently. Personally, I haven't done the required digging to see if the story, rather than investor perception, has changed. However, since that quarterly drop shares of SHLD stand a full 10 points or 15% higher near $76.25 after managing to take out its mid August highs by a narrow margin near $80 a share. "Doink!"

Not so different than August, investor favor continues in the more heavily-traded calls. Additionally and likely linked, heavy short interest continues to maintain a fairly stiff skew in the puts. Ultimately, that's a condition traders should be aware of when considering increased spread risk in the likes of long call calendars and potential hard-to-borrow issues.

In November and a contract which is at this point a lottery ticket to play earnings, implieds are in the low 100s. It sounds rich, but the reality is a severely reduced vega component essentially makes those contracts more about being absolute dollar wagers rather than true volatility plays with just two sessions remaining after the announcement.

Most active with Tuesday's bullish call shoppers was the slightly out-of-money November 80 call on volume of nearly 3,900. Priced at $1.45 per contract, a double in premium would require a move of around 8.50% or 82.83 and about 3.50% above its recent highs. At the same time, in order to breakeven two sessions out, the call buyer will need shares above $81.45 on gains of 6.50% in shares of SHLD.

 

Figure 1: Sears Holdings (SHLD) Daily Shop or Drop?

By comparing the relatively small two percentage point difference in shares and realizing what a large impact it has on how those traders would fare, readers can get a better idea of what it means to play earnings with this type premium. And while the latter's "push" wouldn't add up to very much for those bulls, it would have other directional bulls shoving their way onto the scene to shop for a piece of a broken double top turned into a more optimistically viewed cup-shaped breakout.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler's Forum

The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.

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