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How to Trade Volatility Ahead of Overstock Earnings

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From ecommerce to real estate to cryptocurrencies, Overstock (NASDAQ: OSTK ) has a smorgasbord of unrelated businesses. The company originally started out as a discount online retailer, but intense competition in the space led CEO Patrick Byrne to branch out. Byrne's moves have been both a blessing and a curse for OSTK stock and its investors.

Throughout all of Overstock's saga, volatility has been a mainstay. The shares have traded as high as $89.80 and as low as $16.90 in the past year alone. Right now, OSTK stock is near the midpoint, hovering just below resistance at $40.

The $40 region has been a major sticking point for OSTK stock since March. Wall Street has been unwilling to bid the shares north of $40, and for good reason. Overstock's ecommerce business is struggling, and it's budding cryptocurrency offerings have received unwanted government scrutiny. The uncertainty surrounding both has put OSTK stock in a holding pattern.

That could change come Thursday afternoon. Overstock is slated to step into the earnings limelight to release its second-quarter earnings results. Right now, Wall Street is expecting Overstock to report a loss of 82 cents per share on revenue of $474.15 million. In the same quarter last year, Overstock lost 20 cents per share and posted revenue of $432.02 million.

Sentiment on OSTK stock is a mixed bag heading into earnings. On one hand, Thomson/First Call reports that the one analyst following the shares rates them a "strong buy."

On the other, as of the most recent reporting period, short sellers hold about 42% of OSTK's float short.

Turning to the options pits, we find more bullish sentiment. Currently, the August put/call open interest ratio arrives at 0.49, with calls doubling puts among front-month options.

Amid this optimism, options traders are also pricing in a rather large move for OSTK stock following earnings. Specifically, weekly Aug. 10 implieds are pricing in a 10% move in OSTK stock. This places the upper bound for the expected move at $42 and the lower bound near $34.

Two Trades for OSTK Stock

Call Spread: Trading OSTK stock options ahead of earnings isn't for the faint of heart. But for those traders with enough risk tolerance, an Aug $40/$42 bull call spread has considerable potential. At last check, this trade was offered at $1.07, or $107 per pair of contracts. Breakeven lies at $41.07, while a maximum profit of $3.93, or $393 per pair of contracts - a potential 267% return - is possible if OSTK stock closes at or above $45 when August options expire.

Put Spread: For those looking to take the bearish angle ahead of earnings, an Aug $30/$35 bear put spread is ideal. At last check, this trade was offered at $1.00, or $100 per pair of contracts. Breakeven lies at $34, while a maximum profit of $4, or $400 per pair of contracts - a potential 300% return - is possible if OSTK stock closes at or below $30 when August options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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The post How to Trade Volatility Ahead of Overstock Earnings appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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