Options Update: Are Call Buyers Tuning in to RadioShack?
Back in the day, you could walk into your local RadioShack
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Those days are long gone, and the company has since reinvented itself as a consumer electronics goods store that competes in roughly the same market as Best Buy
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PowerRating). But while analysts are betting on sector leader BBY as hot times and trouble plague City, Wall Street is bereft of the same enthusiasm toward RSH.
Specifically, UBS cut its price target on RSH this morning to $13 per share from $20 per share. The brokerage firm also reiterated its “neutral” rating on the equity. This neutral-to-bearish stance is shared by a majority on Wall Street, as Zacks.com reports that 10 of the 11 analysts following RSH rate the shares a “hold” or worse. Meanwhile, the average 12-month price target for the stock rests at $16.27 per share, according to Thomson Financial.
Despite the reiteration and price-target cut, options traders are piling into calls this afternoon. More than 7,800 RSH calls have changed hands so far today, outpacing the stock’s average daily call volume by a ratio of nearly 15-to-1. This spike in call activity has also placed the shares on our Intraday Volume Explosion List. However, it was the more than 5,000 contracts that traded at RSH’s November 12.50 strike that caught my eye today.
The Anatomy of a Radio Shack Call Position
Diving into the options data, I noticed that nearly all of the RSH November 12.50 call volume traded in blocks of 100 contracts at the ask price. Combine this data with the fact that volume at this front-month option exceeds open interest, and RSH is likely being targeted by heavy buy-to-open call activity. Running with the call-buying theme, it would appear that a trader purchased 400 RSH November 12.50 calls at 10:16 a.m. Eastern time for the ask price of $0.45. The total outlay for this position would be $18,000 — ($0.45 * 100)*400 = $18,000. For this trade to reach breakeven, RSH would need to rally about 15% from yesterday’s close at $11.26 per share before the options expire on November 21. The maximum loss on this position is limited to the initial investment of $18,000.
By entering this trade, the investor is indicating that he expects RSH to surge during the next several weeks. The shares are off to a tepid start, gaining about 1.5% at last check, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
Looking at the chart below, you can see that any call position on RSH would be an aggressive play at the moment. The stock is off more than 33% on a year-to-date basis, and the past several weeks have seen the shares pressured steadily lower by overhead resistance at their 10-day and 20-day moving averages. Furthermore, RSH’s 20-day trendline is positioned just above the 12.50 level, putting quite a crimp in the chances for a November 12.50 call reaching breakeven (roughly $12.95 per share). Additionally, while the security has found support in the 11 region, technical resistance has materialized in the 13 region. From this perspective, it would appear that RSH could remain range-bound for the intermediate term.
The Sentiment Drivers
Meanwhile, the sentiment backdrop for a RSH November 12.50 call is also very uninspiring. Aside from the aforementioned pessimism among Wall Street analysts, only short sellers are betting against the stock. Currently, more than 13% of RSH’s float is sold short. This problem with this indicator is that short sellers may be content to ride out any short-term bounces in the equity in order to capitalize on additional declines in the shares. With several layers of technical resistance overhead, and expectations for a weak holiday season, these bears will be in no hurry to exit their RSH short positions.
Elsewhere, options activity has been heavily bullish – a development that has negative implications when dealing with an underperforming security. Specifically, RSH’s Schaeffer’s put/call open interest ratio (SOIR) of 1.09 ranks below 71% of all those taken during the past year. This reading means that speculative investors have been more bullish toward the shares only 29% of the time in the prior 52 weeks. Should these optimists become disillusioned with a lack of upward momentum from the underlying shares, we could see an unwinding of this bullish sentiment in the form of added selling pressure.
The Verdict?
The combination of lingering optimistic investor sentiment and the stock’s poor technical performance do not bode well for RSH bulls – especially given the short time frame needed for a November 12.50 call to reach breakeven. If a trader was dead set on a bullish RSH position, the time premium and seasonality of a December or January 2009 option might make for better returns.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.