Event: HPQ reports fiscal Q1 tonight after the close,
Options Activity: volumes today are running hot at almost 3x average daily, with 90% of the volume in calls. There is a buyer of the March 38.50 / 42 call spread tied to stock on 37 delta (meaning the buyer of call spread is selling stock against). This call spread has traded 18,000 so far for .92, and has sold about 660,00 shares at $38.30. This could be an investor coming out of a long stock position and defining their risk into the potentially volatile event.
Technicals / Price Action: The stock is down almost 5% in 2015, and down about 7.5% from the 52 week and multi-year high made in early January.
The six month chart below shows the stock at $38 at a fairly important near term technical spot with near term support at $36 on the downside right below the 2015 lows and very near its rising 200 day moving average (yellow line below). And on the upside, $40 appears to be near term resistance with the next logical level the double top from December and January near $41:
[caption id="attachment_51292" align="aligncenter" width="600"]
HPQ 6 month chart from Bloomberg[/caption]
Given the implied move of about 5%, or $1.90 by Friday’s close the levels look fairly reasonable to achieve on both the upside or the downside, in other words the implied move looks fair, not particularly cheap, or expensive.
My View: I know it seems like an eternity ago when IBM reported disappointing Q4 results in mid January that were highlighted by what appears to be a growing headwind from the strength of the dollar, but I would add this could be more pronounced in HPQ as they only get about a third of their sales from the U.S.
The stock is cheap trading a little less than 10x expected 2015 earnings growth of 6%, but as you have heard me say on many occasions, stocks like HPQ trade cheap to their peers and the market for a reason, they are selling commoditized products with pricing pressure.
I am not a fan of HPQ here, as it seems they have been in a perpetual restructuring, and the company is in the processes of splitting into two public traded companies (announced in October) cutting the cord between their computer / printer business from corporate hardware / services operations.
I would add that computer sales still make up 30% of their total sales, and if MSFT’s recent guidance and commentary on the PC front is any guide, the upgrade cycle is over. As for services, well, they continue to gain share but are competing on price. I am not a fan and suggest that the management has their hands full, and for those who want to play any excitement into the tax free split are likely to have a better opportunity lower.
Depending on your directional bias or current positioning, these trades look interesting:
Hypothetical Trades:
Bullish: HPQ ($38.19) – Buy the March 38/41 call spread for about $1. Risk $1 to break-even at $39, with max gain of $2 on March expiration. This is a decent risk reward, for those looking to define risk into the print, but some may not want to cap potential upside, and merely buy calls.
OR
Bearish: HPQ ($38.19) Buy the March 38/34 put spread for about $1.05, break-even at $36.95, with gains of up to $2.95 between $36.95 and 34 on March expiration.