Volume is spiking in Tiffany & Co.'s
(NYSE:TIF) options pits today, just one session ahead of the jeweler's appearance under the earnings spotlight. Against this backdrop, the equity's 30-day at-the-money implied volatility measure has advanced 5.2% to 36.4%, the reading's highest point since mid-March. About 18,000 contracts have traded so far, which is roughly six times the anticipated amount, with calls being slightly preferred to puts.
One of the more interesting transactions that took place today, just before noon, was one speculator's entry into a long straddle position. A single individual simultaneously traded blocks of 500 January 2014 82.50-strike calls and puts near their ask prices -- that is, at $5.05 and $6.30, respectively -- for a total net debit of $11.35 per pair of contracts. Volume outstrips open interest at both strikes, and implied volatility increased on the trades, pointing to buy-to-open action.
Therefore, in order for the block trader to profit by January options expiration, TIF shares -- currently sitting at $81.93 -- must perforate one of the two breakeven marks: $93.85 (strike price plus net debit) or $71.15 (strike price less net debit). Beyond that range, the investor stands to profit as the underlying rises or falls. Alternatively, if the shares stay within the range, the most the trader can lose is the premium paid, which would occur if Tiffany finished exactly at $82.50.
Also, data from the International Securities Exchange (ISE) shows a group of traders sold Tiffany calls to open at the September 85 strike. In doing so, based on the volume-weighted average price (VWAP) of the transactions, the speculators picked up $1.67 per contract -- which also represents their maximum potential gain on the play, should the shares not rise above $85 over the course of the next four weeks. However, if the shares rise above the strike during that time span, the call sellers could potentially be forced to deliver the shares for $85 each, no matter how high they rise.
That's a distinct possibility, too, considering TIF is up close to 42% year-to-date. Moreover, since mid-January, the stock has traded consistently above its ascending 20-week moving average, which functioned as a layer of support in June.
As mentioned earlier, Tiffany & Co. will be reporting its second-quarter earnings tomorrow before the market opens. The company has a mixed history in the earnings confessional, having beaten earnings-per-share estimates in just four out of its last eight quarterly updates. This time around, analysts are expecting TIF to report a profit of $.74 per share, $.02 better than its year-ago result.
This article by Alex Eppstein was originally published on Schaeffer's Investment Research.
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