Lowe's (LOW) Option Traders Betting on Bearish Guidance

Growing number of put options in open interest

Investors of Lowe's Companies, Inc. (LOW) have bid up the share prices to an above average range ahead of the company's upcoming guidance report for the rest of the fiscal fourth quarter. At first glance, it appears that option traders are positioned for a negative move, as the number of put options in the open interest are rising. The unusual option activity could create a strong downward trend in the price action if Lowe's delivers muted or negative guidance for the quarter. 

A sizable number of put options is growing in the open interest for Lowe's, and option premiums are unusually high right now. Trading volumes indicate that traders have been buying puts and selling calls in anticipation of unfavorable guidance. Unwinding these bets could create unforeseen upward pressure on the share price of Lowe's.

Accurately predicting the direction a stock will move after offering guidance is difficult. However, a comparison between the stock's price action and option activity shows that, if Lowe's delivers a positive report, the company's share price could rise, moving further above its 20-day moving average after the guidance. This is possible because options are priced for a move to the downside, but unexpected positive guidance could catch traders by surprise and create a rapid increase in share price.

Key Takeaways

  • Traders and investors have bid up the Lowe's share price ahead of the guidance update. 
  • The share price has recently been closing above its 20-day moving average.
  • Call and put pricing is predicting a stronger move to the downside. 
  • The volatility-based support and resistance levels allow for a stronger move to the downside.
  • This setup creates an opportunity for traders to profit from an unexpected guidance report.

A comparison between the details of both option behavior and stock price can grant chart watchers valuable insight. However, it is necessary to understand the context in which this price action took place. The chart below depicts the price action for the Lowe's share price as of market close Monday, Dec. 13. This created the setup leading into the guidance update.

Earnings pricing for Lowe's (LOW)

Current Trends

Over the past month, the trend for Lowe's stock has the share price rising to an extreme high of the volatility range in mid-November, before settling into an above average range above the 20-day moving average. In this time period, it's notable that the lowest Lowe's share price was around $233 in mid-November, whereas the highest share price was roughly $263 in mid-December. Lowe's shares have been on a consistent upward trend, and the share price closed in the upper middle region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the average true range (ATR) for the stock. This array helps to highlight the way the price has remained above the 20-day moving average in the week before earnings. This price move from Lowe's shares implies that investors' confidence is growing as the guidance update approaches.

Tip

The average true range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context, where the price trend for Lowe's has recently closed above its 20-day moving average, chart watchers can recognize that traders and investors are expressing confidence ahead of the company's updated guidance. It's notable that, in the week before the guidance update, the Lowe's share price has continued to rise, having recently set an all-time high. That makes it important for chart watchers to determine whether the move is reflecting investors' expectation for favorable guidance or not.

Option trading details can provide chart watchers with additional context to help them form an opinion about market and investor expectations. Recently, option traders are favoring calls over puts by a noticeable margin. On Monday, there were over 10,600 calls traded as opposed to 6,300 puts. Normally, this volume indicates that traders are feeling bullish toward the upcoming guidance.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that Lowe's shares are in an above average range and have priced their options as a bet that the stock will close within one of the two boxes depicted between today and Dec. 17, the Friday after the guidance report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 34% probability that Lowe's shares will close inside this range by the end of the week. The red box represents the pricing for put options with a 35% chance if prices go lower on the guidance update.

It's necessary to note that the open interest featured nearly 98,000 call options compared to almost 128,000 puts, demonstrating the bias that option traders had, as traders favored puts over calls. It's notable that, while recent trading volumes favored calls over puts, which would be considered bullish, implied volatility for calls in the open interest has been falling, which implies that these options are being sold rather than bought. This translates into a bearish outlook.

Option pricing for Lowe's (LOW)

The purple lines on the chart are generated by a 10-day Keltner Channel study set at 4 times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run either way, but with much more room to the downside. This suggests that option buyers don't have a strong conviction about how the company will report, even though put option open interest is significantly higher than call option open interest. Although investors and option traders do not expect it, a surprising guidance update could push prices dramatically higher or lower.

Volatility pattern for Lowe's (LOW)

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly good or bad, will catch investors by surprise and could generate an usually large move. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

As a member of the S&P 500 and a leader in the home improvement retail industry, Lowe's could be considered a bellwether stock. Even so, the company's guidance update likely won’t have a direct effect on index prices.

However, no matter what the guidance report says, it could have an impact on stocks in the home building and improvement industries. Positive guidance could lift other stocks in the industry such as The Home Depot, Inc. (HD) or Lennar Corporation (LEN). It could also affect exchange traded funds (ETFs) such as State Street's Homebuilders ETF (XHB), Invesco’s Dynamic Building & Construction ETF (PDB), or the iShares U.S. Home Construction ETF (ITB).