How traders are positioning ahead of earnings this week, including an upside bet on this chip stock

Published Mon, Nov 13 202310:39 AM EST

Nearly 90% of the Russell 1000 index have reported earnings this seen so we'll start focusing on some other catalysts soon, but a few big reports remain. Let's review how options traders are positioned ahead of the key results due this week. As always lines, highlighted in green below are names we hold (long), and to ensure they catch the eye, those earnings related moves that are greater than 5% as implied by current options prices are highlighted in yellow. Down nearly 25% year-to-date, Tyson Foods (TSN) , traded well above average options flow on Friday. The November $40 puts were most active. Street analysts tend to skew optimistic, most stocks have far more "buy" recommendations than "holds" or "sells". Such is not the case for TSN because the company has been facing several pressures concurrently. Stagnant topline and declining margins mean that the trailing multiple is actually higher despite the sharp price declines. As a potential counterpoint, I would offer that cost-saving efforts such as plant closings and increased automation take time to implement. As a food company, TSN isn't a cyclical per se, but a truism of cyclical businesses is that they trade at the cheapest multiple at market peaks and the richest multiple at troughs as the market will bake-in some earnings mean reversion. Full year EPS of $1.19 a share represents a decade low, and if it can claw back to the $2.84 a share consensus for FY2024 that would represent 16.5 times multiple. We don't own it, but I would not press shorts in the name and we're getting to a point where I might be inclined to buck the market's bearish posture. Keep an eye on the cash-burn for this reported quarter though as debt levels are at an all-time high. It's been an abysmal year for some in the EV space. Fisker (FSR) is no exception. We touched on the options flow in LCID last week. Here too options flows are less than sanguine, and likely for the same reasons. FSR reported $470mm cash on hand for the quarter ended June 30th, and the Street's expectation was that provided four to five quarters worth of runway at the burn rate they've been experiencing. Unsurprising then that the January $3 puts traded over 22,000 contracts on Wednesday including a purchase of more than 10k for $1.25/contract — more than 40% of the strike price. These types of put purchases are frequently the type of activity one sees when companies begin to make "ability to continue as a going concern" types of statements and disclaimers. Fisker has attempted, after an earlier run as a car maker foundered, to run a more "asset light" business, but still that negative free cash flow needs to get under control. Home Depot (HD) is a holding of ours and at 18.5 times forward earnings estimates it's trading at a discount to its own historical valuation which is closer to 20 times over the past two years. HD and Lowe's both saw meaningful boosts to their business during the pandemic as home improvement took off. Where Home Depot differs from Lowe's is sales to professionals/contractors, which represents 40% of their business. Admittedly, high mortgage rates are a bit of a concern on that front, while rising signs of pressures on consumer finances could also crimp sales growth as consumers increasingly hold off on purchases of big ticket items, such as appliances, particularly. Excluding options that expired this past Friday, the most active contracts this past week were puts, although not every put that trades is a bearish bet. For example, an institutional trader sold 1200 January $225 puts at 50 cents. A put seller is willing to get long the stock at the put strike in the event the stock price declines below that level — essentially they are selling insurance to other investors who are betting on a potential decline. I like the strategy generally, selling puts to collect premium on stocks one hopes to own at lower prices. Considering we own it we must like it at the current price. At $225, a more than 20% discount to Friday's close, it would be even more appealing. That said I do not favor selling options for less than 1% of the strike price in terms of monthly premium collected, and I usually favor selling options between catalysts such as earnings, even though options premiums tend to be a bit lower. So if you hold the stock, maybe wait until after earnings to sell covered calls, and if you don't, wait until after earnings to sell cash covered puts. Target (TGT) is another company that has traded very poorly year-to-date and is trading at an enormous discount to its historical valuation, and at just 12.7 times forward earnings, a huge discount to peers such as Walmart (WMT). Given we own both I suppose one might suggest we have a big of a barbell approach. Target always felt like an upmarket, and more approachably scaled store when compared to Walmart. Walmart has gotten credit for expanding into grocery, which Target has also been attempting, albeit on a far more limited scale. One of Target's larger missteps was their LGBTQ Pride merchandise offerings which prompted calls for a boycott, which data suggests did prompt some market-share losses. My expectation is that those setbacks are likely temporary, and this likely provides an opportunity to pick up the shares at a discount. Options markets are on edge, the 7.7% earnings-related implied move reflects considerably greater uncertainty than the less than 4% implied move in Walmart for example. An institutional trader paid 76 cents fo