plunged on a weak earnings report yesterday, but one big option trade is betting that the market overreacted.
OptionMonster’s tracking systems detected the purchase of more than 19,000 January 17, 2014 calls against previous open interest of just 213 contracts. The options initially priced for $1.10, but the buying pushed up premiums and the large blocks traded for $1.15.
Those callslock in the price that the trader must pay to own shares in the office retailer for the next 20 months. These options can generate significant leverage if the stock rallies, but if it doesn’t, they will dwindle in value as time passes and eventually expire worthless in January 2014.
Staples shares declined 5.69 percent to $13.91 yesterday, down nearly 9 percent at one point in the session. The selloff came after a weakening European economy dragged down sales and severance costs resulting from employee layoffs squeezed profit margins.
The office-supply retailer has been facing secular headwinds for years amid slow business at its traditional stores. Management is now attempting to compensate with growth in other areas.
Yesterday’s calls allow investors to position for a turnaround, while risking much less money than they would by owning shares. It also lets them control a large number of shares down the road without having to worry about building that position.
Overall option volume was almost seven times greater than average in the session. Calls outnumbered putsby 3 to 1, so the option activity was bullish despite the drop in the shares.
—Russell has no positions in SPLS.
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David Russellis a reporter and writer forOptionMonster .