Mid-Market Update for 3/2/2017

Hard to Strangle Big Lots (BIG)

1:40pm (EST)

I mentioned on Monday afternoon there were a number of stocks that would make big moves this week and I highlighted Big Lots (BIG) making a potential 5%-10% move. The company will report earnings ahead of Friday’s open with Wall Street expecting a profit of $2.22 a share on revenue of $1.59 billion.

The high estimate has earnings pegged at $2.27 a share with the low at $2.20. This could mean a nickel beat or a 2-cent miss. Although the company has topped estimates the past four quarters by 5, 6, 12 and 2 cents over the past four quarters, this could be a lofty goal given the current state of the retailers. In fact,Big Lots has missed revenue estimates in 3 of the past 4 quarters.

The current revenue estimates are at $1.59 billion and $1.58 billion as the high/ low and this could lead to a bigger beat or revenue miss given the low spread. A revenue number south of $1.58 billion, along with lower guidance, could cause analysts sentiment to turn even more sour. However, an earnings beat, along with a dividend hike from the current 1.6% could propel shares higher.

There are currently 15 analysts that cover Big Lots earnings with only one Strong Buy and two Buy recommendations. Three of the suit-and-ties have a Hold rating, four Underperform and five Sell rating round out the sentiment. I more in the bearish than bullish camp but the company has been known to pull a rabbit out of the hat with the earnings beats.

Shares rallied 4% intraday last December; gained 14% last May; and added nearly 3% last March following the earnings announcements. The stock fell nearly 5% last August after reporting quarterly results.

The chart below shows a downward sloping 50-day moving average with near-term support at $51.50-$51. Additional support is at $50-$49.75 and the 100/200-day moving averages. A death cross is in the process of forming with the current slope action and usually represent a bearish development. Resistance is at $53-$53.50 with a move above $54 likely leading to short-covering. The 52-week high is at $56.54.

Bearish traders can target the BIG March 47.50 puts (BIG170317P00047500, $0.80, down $0.05) for a possible 10% drop that would shave over $5 and have the stock near $47. A double, or 100% return, would occur if shares fall below $45.90, technically, by March 17th.

Bullish traders can target the BIG March 57.50 calls (BIG170317C00057500, $0.70, up $0.10) for a possible surge past $57 on a 10% move in the stock from current levels. These call options would double if shares trip $58.90 by March 17th.

The aforementioned near-term options expire two weeks from tomorrow and a less than 10% would crush the premiums in both the call and puts. A strangle option trade could be deployed using both options with a price tag of $1.50. This would put the breakeven points for the trade at $59 and $46. Profits would be made on a move above or below these levels with a double occurring if shares clear $60.50, or fall below $44.50. This would have the calls or puts $3 in-the-money.

Of course, this would require a much larger move in the stock of 15% or more from current levels with just over two weeks for the strangle option trade. If you are on the wrong side of a directional call or put option trade, you losses could be 90%-100%. If shares moves less than 5%-10%, the call and puts could both suffer significant losses.

Given the risk/ reward of the strangle option trade, and the unpredictable reactions to earnings announcements, my homework has me on the sidelines for a possible trade. However, there could be a play post earnings announcement with the April option chains so keep shares on your Watch List.

Turning our focus on the market, the bulls are taking a breather following a choppy open. The Dow is down 61 points to 21,053 while the S&P 500 is lower by 10 points to 2,385. The Nasdaq is off 30 points to 5,873 and the Russell 2000 is falling 10 points to 1,403.

I have update the parameters for our latest trade, FOLD, along with the other positions. Stay close to your email inboxes in case I take additional action ahead of the closing bell.