Tuesday Earnings Spotlight: LOW to the Long Side

Lowe’s Companies Inc. (NYSE: LOW, 58.35) has been building investor portfolio’s in 2014, with share up over 17% year today. The stock has traded in a 52-week range of $44.13-$59.16, having made a new high in Monday’s session.

Lowe’s quarterly earnings report is scheduled for Wednesday morning before market open, with consensus analyst estimates calling for EPS of $0.58 on revenues of $13.55 billion. For the same quarter one year prior, Lowe’s beat analyst estimates by $0.01 with EPS of $0.48 on $12.96 billion in sales.

LOW stock offers no serial options, however, standard November contracts have 3 days left till expiration Friday and are thus trading in the same manner as weeklys would. The LOW Nov 60 Straddle is trading $2.64-$2.82, implying a move of about 4.7%. LOW stock has moved an average of 4.2% over the last 8 quarter son earnings news, with the options market forecasting an above average move for this quarters announcement. LOW stock has rallied on 2 of the past 4 earnings announcements, and 4 of the past 8.

Home Depot (NYSE: HD, 96.95) recently sold off following a strong earnings report, but concerns were raised on the call over litigation costs following the company’s recent data breach where consumer credit card info was infiltrated. It is reasonable to expect Lowe’s to report similarly strong numbers without the associated legal costs, so I will look to play LOW to the long side.

My Trade: Buy the Nov LOW 60-62.5 Call Spread for $0.50
Risk: $50 per 1 Lot
Reward: Up to $200 per 1 Lot
Break-even stock price at expiration: $60.50

This trade is somewhat aggressive due to the fact the strikes are $2.50 wide (remember, these are Nov serial contracts, not weeklys) and this sets up somewhat past the upside measured-move target (about $61.25). However, the trade does have the potential to pay 4:1 on my money and thus offers a favorable risk reward setup.

Greeks of this trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long