Tuesday morning, U.S. home-improvement retailer ^LOW^ reported fourth-quarter earnings. The company saw its profit rise 27% thanks to higher demand for big-ticket items. That said, the company forecast first-quarter earnings that came in below the Street’s first-quarter forecast. For the record, Lowe’s first-quarter forecast was 27 cents to 29 cents per share – the Street expected 33 cents per share. In early trading, the stock seemed tethered to the 23 level, a spot to which it may be growing rather accustomed. It certainly seems that option players have taken note of this fact.
The March 23 strike saw the heaviest action, with nearly 6,000 calls and nearly 5,000 puts crossing the tape. While some of this activity could have been related, let’s take a look at the potential of straight call and put purchases on the nation’s second-largest home-improvement firm.
A bullish trader buying the March 23 calls would have dished out somewhere around 63 cents (the ask price at the time of close). The at-expiration breakeven point on this option strategy would then come in at $23.63 (the strike price plus the premium paid). Can the stock break this level by the third Friday of March? Checking out a weekly chart for LOW, the stock has run headlong into resistance at the 23.50 level, a break of this level could lead to a break out, and profits for long call players.
On the other side of the coin, we have the puts. If these were straight put purchases, a trader would need the stock to drop below $22.44 (strike price (23) less the premium (56 cents at the time of close))by expiration to gain a profit. This potential option play, too, sets up an interesting technical scenario. LOW’s 10- and 20-week moving averages are in a position to provide support. History suggests that these trendlines could provide support again.
No matter the position (puts or calls), traders will need to be vigilant – as the window to make money on either of these positions could be extremely limited unless the current channel is broken.
Dan Passarelli is the author of the book Trading Option Greeks and founder and CEO of Market Taker Mentoring LLC. Passarelli began his trading career trading on the floors of the Chicago Board Options Exchange and the Chicago Board of Trade making markets in options. He regularly shares trading insights and educational tips in his options blog (markettaker.com/options_blog/). Dan can be reached through his website MarketTaker.com and can also be followed on Twitter at twitter.com/Dan_Passarelli.
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