Big Printin’ – $LOW Rider

by Dan February 3, 2016 3:15 pm • Commentary

One of the worst performing stocks today in the S&P 500 (SPX) is Lowe’s (LOW). The home improvement retailer is down 6% on news that the company agreed to pay $2.3 billion for Canadian retailer RONA.  Wow, at LOW’s lows today  at $65, the market cap loss of $5 billion was more than double that of the acquisition price.

Despite the weak price action in the stock, options volumes today are heavily skewed towards calls, with 45,000 trading as I write to 9,000 puts.  The two most active options strikes are the March 67.50 and 70 calls, with 11,000 and 24,000 trading respectively.  It appears that one trader was looking to play for a bounce back to $70 by March expiration.

When the stock was $66.75, a trader paid about $1.10 for 10,000 of the March 67.50 / 70 call spreads to open.  This trade breaks-even at $68.60, and offers profits of up to $1.40 between $68.60 and $70 with a max gain above $70.  The trader is risking about $1.1 million to possibly make $1.4 million if the stock is above $70, or up about 5% in a little less than 6 weeks.

Taking a quick look at the one year chart, it appears that the stock found some intra-day support just above the August low, which also happened to be the 52 week low, but would appear that the trader sees the stock hitting some technical resistance at $70:

LOW 1yr chart from Bloomberg
LOW 1yr chart from Bloomberg

There is a chance that this trade is leverage to an existing long position in the stock, and with more than two times the size trading in the 70 calls vs the 67.50 calls, possibly a ratio call spread vs long stock, which is a leveraged overwrite.

I’ll make one last point about the magnitude of the sell off in LOW. Maybe investors simply don’t like the acquisition. But maybe it’s that investors were looking for any excuse to sell a stock that even after today’s shellacking trades 21x trailing earnings, or 1x eps growth, despite only 5% sales growth.