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Call Buyers Eye Outperforming Luxury Stock

Published 07/31/2018, 02:33 AM
Updated 03/15/2018, 09:55 AM

Luxury apparel stock Ralph Lauren Corp (NYSE:RL) is little changed in afternoon trading, last seen at $135.91. The upscale clothing-and-accessories concern is slated to report its fiscal first-quarter earnings this Tuesday, July 31, before the market opens. Ahead of the impending report, options traders appear to be betting on more upside for the outperforming equity.

Ralph Lauren stock has been making its way higher since bottoming around $66 per share in May 2017. RL is up 80% year-over-year, and just off its June 7 three-year high of $145.94. The stock's few pullbacks this year have been quickly contained by the 50-day and 120-day moving averages, which formed a bullish cross last August.

RL with Golden Cross and 50 120MA

Looking back, Ralph Lauren stock has swung higher the day after the company reports earnings in five of the past eight quarters, including a 14.3% surge higher in May. On average, the equity has moved 7.4% in the post-earnings session, regardless of direction. This time around, the options market is pricing in larger-than-normal 10.1% swing. If the post-earnings swing turns positive, this could mean another round of multi-year highs is in store for the retailer.

Diving into options, traders are call-heavy on RL. Call open interest of 22,584 contracts registers in the 95th percentile of its annual range, per Trade-Alert, while put open interest of 25,483 contracts stands in just the 28th annual percentile.

The stock's August 135 call has seen the largest increase in open interest over the past 10 days, with roughly 2,150 contracts added here. Data from the major options exchanges points to buyer-driven activity at this in-the-money strike, which currently sports a delta of 56% -- implying slightly better-than-coin-flip odds that the option will expire in-the-money three weeks from now.

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Elsewhere, short interest on RL fell 10.8% during the past two reporting periods, but still represents more than 11% of the stock's total available float. At Ralph Lauren stock's average daily trading volume, it would take the better part of two weeks for shorts to cover their bearish bets. This leaves RL well-positioned to benefit from continued short-covering activity if the luxury stock can pull off a positive earnings surprise tomorrow morning.

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