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Option Bulls Flood Foot Locker Ahead of Earnings


FL traders are buying call options at a near annual-high clip.

In parity with the broader equities market, Foot Locker, Inc. (NYSE:FL) barreled higher on Tuesday, touching a fresh year-to-date high. What's more, options traders are expecting even more short-term upside for the stock, with bulls picking up April-dated calls ahead of earnings.

By the closing bell, FL had seen around 7,100 calls change hands -- about 11 times its average daily call volume. For comparison, just 201 FL puts were exchanged.

Most of the action happened at the April 36 call, which saw more than 5,000 contracts cross the tape at a volume-weighted average price (VWAP) of $1.09. A healthy portion of the calls traded at the ask price, and open interest increased overnight, pointing to buy-to-open volume.

By purchasing the calls to open, the buyers' profit will increase the higher FL surmounts the $37.09 level (strike plus VWAP) within the next several weeks. As of yesterday's close, delta for the calls sat at 0.45, suggesting the options market is giving the contracts a roughly 45% chance of moving into the money. However, should FL retreat or report disappointing earnings before the opening bell on Friday, the most the buyers can lose is the initial premium paid for the calls.

Expanding our sentiment scope, we find that yesterday's appetite for long calls was par for the course. In fact, on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open almost 19 FL calls for every put during the past two weeks. Compared to similar readings of the past year, the stock's 10-day call/put volume ratio of 18.76 ranks in the 96th percentile, suggesting option buyers are establishing bullish positions at a near annual-high clip.
Analysts are also optimistic when it comes to FL. Currently, the stock boasts 11 "strong buy" endorsements, compared to one lukewarm "hold" and not a single "sell" or worse suggestion. Plus, the average 12-month price target stands at $41.20 -- in territory not yet charted by the stock.

Historically, Foot Locker has bested consensus bottom-line earnings estimates in each of the past four quarters. Another solid earnings showing at the end of the week could help the shares barrel through potential resistance in the $36-$36.50 region, which rejected the equity's rally attempts in late 2012. On the other hand, a disappointing turn in the earnings confessional could put FL at risk of a bullish exodus.

In early trading, FL has added 0.3% to wink at the $35.43 level.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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