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Bullish Predictions Payoff For Skechers Call Buyers

Today’s tickers: SKX, RCL, OSK & TWI

SKX - Skechers USA, Inc. – The footwear designer’s decision to purge inventory of some 2 million pairs of its Shape-ups sneakers in exchange for a $21 million loss pleased investors reviewing the somewhat ugly second-quarter earnings report released from Skechers USA on Wednesday. Shares in the Manhattan Beach, CA-based company sky-rocketed 25.0% on Thursday morning to an intraday high of $17.88 despite the shoe retailer’s reported net loss of $0.62 a share on 14% lower revenue for the quarter. Steps taken by the company to clear out inventory as well as promising international growth prospects seem to have overshadowed weaker-than-expected top- and bottom-line results. Bullish momentum in the shares was also aided by an analyst at BB&T Capital Markets who raised Skechers to ‘Buy’ from ‘Hold’ with a 12-month target share price of $18.00.

On Monday we noted bullish call buying taking place in the September and October contracts, and suggested traders long those calls may benefit from a post-earnings pop in the price of the underlying. Lo-and-behold, shares are soaring and some investors have seen the value of their positions more than double this week. For example, traders purchased around 2,200 October $15 strike calls on Monday for an average premium of $1.07 apiece. Today investors could turn around and sell those calls for an average premium of $2.65 a-pop, or hold onto their positions in the hope that shares continue to rally in the next few months. Like-minded bulls picked up around 500 of the September $15 strike calls on Monday at an average premium of $0.85 each, while the last-traded price on the contract now stands at $2.35.

Investors initiating fresh bullish positions on Skechers USA in the aftermath of second-quarter earnings are picking up calls across several expiries. Trading traffic is heaviest at the September $17 strike where more than 2,900 in-the-money calls changed hands against previously existing open interest of just 37 contracts. It looks like the majority of these contracts were purchased at an average premium of $1.12 a-pop. Call buyers profit at September expiration if shares in SKX rise 1.3% over today’s high of $17.88 to exceed the average breakeven price of $18.12. Options implied volatility on the stock dropped 17.7% to 45.13% by 11:35 am in New York.

RCL - Royal Caribbean Cruises Ltd. – Lower-than-expected second-quarter net income coupled with the cruise operator’s revision lower to estimates for full-year earnings sent shares in Royal Caribbean Cruises down as much as 11.2% during the first half of the session to $31.75. The disappointing earnings report spurred bearish activity in RCL options. Traders expecting rough seas to persist looked to in- and out-of-the-money puts in the front month, while investors who had positioned for post-earnings turmoil took profits off the table. Pessimists anticipating further bearish movement in the price of the underlying picked up around 2,100 puts at the August $31 strike for an average premium of $0.80 apiece, and purchased another 1,800 put options at the lower August $30 strike at an average premium of $0.60 each. Traders long the puts profit should shares in RCL drop another 4.9% and 7.4%, respectively, by expiration next month. Bears coughed up $2.28 in premium to get long some 525 in-the-money puts at the August $34 strike, as well. Meanwhile, the sale of 1,000 deep in-the-money puts at the August $38 strike for premium of $5.35 a-pop may represent profit-taking. Open interest in the August $38 strike put suggests some 3,000 contracts were purchased for an average premium of $2.13 each on July 7. Investors long the puts at $2.13 apiece have seen the value of their positions more than double in the past three weeks.

OSK - Oshkosh Corp. – Shares in the largest provider of armored trucks to the U.S. military plunged 15.6% this afternoon to $24.30 after the company posted a 68% drop in third-quarter profits to $0.75 a share ahead of the opening bell. It looks like the sharp correction in the price of Oshkosh Corp.’s shares inspired some investors to pick up medium-term bullish call options on the stock in case of an eventual rebound in the price of the underlying. Traders purchased some 1,500 calls at the October $28 strike for an average premium of $0.80 each, and another 775 calls up at the October $29 strike at an average premium of $0.62 apiece. These positions are profitable above breakeven prices of $28.80 and $29.62 at October expiration if shares in Oshkosh jump 18.5% and 21.9%, respectively. In contrast, it looks like traders who initiated pre-earnings bullish strategies on OSK took a big hit this morning and opted to throw in the towel today. Call open interest at the Jan. 2012 $28 strike suggests around 3,000 calls were purchased Monday for a hefty premium of $4.40 each. Earlier this morning, it looks like 3,000 calls sold at that strike for just $1.31 per contract.

TWI - Titan International, Inc. – Put options on the manufacturer of tires and wheels for customers in the agricultural, earthmoving/construction and consumer markets are active this morning. Shares in Titan International rallied 4.0% to $27.04 in early-afternoon trade on the heels of better-than-expected second-quarter earnings released after the final bell on Wednesday. It looks like traders populating TWI puts are selling the majority of some 2,000 contracts exchanged at the October $25 strike today to pocket an average premium of $1.41 each. Put sellers keep the full amount of premium received on the sale as long as shares in Titan exceed $25.00 through expiration in October. Short puts at the October $25 strike suggest investors are willing to have shares put to them at an effective price of $23.59 each ($25.00 – $1.41) in the event that the options land in-the-money at expiration day. Options implied volatility on the tire maker dropped 15.0% to 46.04% by 12:30 pm on the East Coast.


Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Caitlin Duffy

Equity Options Analyst


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