Tuesday, August 25, 2009

FRED Options Active Into Earnings

Fred's Inc. (FRED), which operates discount general merchandise retail stores and pharmacies, is seeing a second day of unusual options activity ahead of its earnings announcement on Thursday.

On Monday (8/24), Nov15 calls were very active, with a block of nearly 10,000 trading. CrimsonMind.com reports that these were traded at 45 cents (bid 35, ask 65 cents).

Today (8/25) we observed unusually high volume in the September puts. 2,500 $10Sept puts were apparently sold for 5 cents, with 2,500 $12.50Sept puts bought for 40 cents. Zero calls have traded today.

The action seems bearish on both days, but I'm excercising caution right now for four reasons. First of all, FRED already has a high short interest ratio of 19 (11.6% of float short). Secondly, the discount retailers have been on a tear this week with positive earnings from BIG and TUES. Thirdly, the fundamentals don't look too bad (low debt, trading at 0.30x sales). And lastly the chart is looks fairly positive at the moment. The momentum is clearly up for the last few trading sessions with all of the oscillators indicating positive short term movement.

For now, I won't take a position, but I'll reassess tomorrow particularly if the stock gets nearer to $14.

Update (8/25 at 2:55pm): It looks like another two blocks of the $10Sept and $12.50Sept puts have traded (volume has risen to just over 5,000 for each option today versus open interest of zero and 46).

Update (8/26 at 2:35pm): Another two blocks of the $10Sept and $12.50 puts have traded today (around 2,500 each). The last sale is shown at 5 cents (bid), and purchase for 40 cents (ask), respectively.

Update (8/27 at 8:25am): FRED reported eps in-line and outlook in-line this morning. Premarket bid and ask indicate a slightly higher open today. In the meantime, open interest on the Sept $10 and $12.50 puts is about 7,500 apiece. So, it's unclear what the reason was for the strong bearish sentiment over the past week. Was it based on the upcoming earnings release or is there more news to come?

Update (9/3 at 10:15am): FRED reported August SSS down 1.4% today. Shares are down about 80 cents to $11.85. Those $12.50Aug Puts have traded for 86 cents, more than double their purchase price from last week.

Chart from Aug 25th: