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Verizon Communications Inc. Option Buyers Expect an Earnings Beat

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VZ optimists purchased short-term call options ahead of earnings.

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Option traders are placing bullish bets ahead of earnings from Verizon Communications Inc. (NYSE:VZ), as evidenced by the growing appetite for long calls. During the course of Tuesday's session, the blue chip saw roughly 23,000 call options change hands -- a 62% mark-up to its average daily call volume, and nearly five times the number of VZ puts exchanged.

Garnering the most attention was the July 51.50 call, which saw more than 12,400 contracts cross the tape at a volume-weighted average price (VWAP) of $0.13. The majority of the calls traded on the ask side, and open interest soared by more than 8,000 contracts overnight, underscoring our theory of newly bought bullish bets.

To profit on the play, the buyers need VZ to surmount $51.63 (strike price plus VWAP) by Friday's close, when July-dated options expire. Verizon -- currently trading at $50.96 -- is scheduled to report earnings bright and early tomorrow, so the buyers are looking for a quick 1.3% uptick after the release. Risk, meanwhile, is capped at the initial premium paid for the calls.

From a broader sentiment standpoint, yesterday's preference for calls merely echoes the growing trend seen on the major options exchanges. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity sports a 50-day call/put volume ratio of 1.50 -- just 5 percentage points from a 12-month high. In other words, option buyers have picked up VZ calls over puts at a near annual-high clip during the past 10 weeks.

As a result, the stock's Schaeffer's put/call open interest ratio (SOIR) is docked at 0.94, indicating that calls outnumber puts among options with a shelf-life of three months or less. This ratio stands higher than just 19% of all other readings of the past year, pointing to a deeper-than-usual skew for VZ's short-term calls over puts. In fact, the aforementioned 51.50 strike is now home to peak call open interest in the soon-to-expire July series, with nearly 9,600 contracts in residence.

On the charts, VZ has spent the past couple of months stagnating between the $49 and $51 levels, and has underperformed the broader S&P 500 (INDEXSP:.INX) by 10 percentage points during the past 60 sessions. However, the security is on pace to end the week atop its formerly supportive 10-week moving average for just the second time since mid-May.

Historically, the past two trips to the earnings confessional have been positive for VZ, with the stock averaging a gain of 2.6% in the week after the report. This time around, analysts, on average, are calling for a per-share profit of $.73 for the company.

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

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