Why furniture bulls may expect an earnings pop


Will a high-end furniture stock go higher? At least one big trader seems to think so.

RH, formerly known as Restoration Hardware, peddles four-figure sofas, rugs and cabinets. Yesterday someone bought 5,000 June 110 calls for $5.75 and sold an equal number of June 120 calls for $2.50. It netted out to a debit of $3.25.

That’s a bullish spread, with the long calls fixing in a $110 entry price on the stock. Selling the 120s generated income to offset the cost and obligates them to deliver shares if it rallies over $120. (See our Knowledge Center.) They’re essentially looking to collect $10 from RH closing at $120 or higher on expiration next Friday.

Guess what comes between now and then? That’s right, quarterly earnings. The company beat expectations and issued strong guidance the last time it reported on March 27. Now, with the next set of numbers scheduled for Monday afternoon, June 11, that call spread could profit from another jolt higher.

RH rose 4.84 percent to $105.94 yesterday, climbing along with other retailers like Macy’s (M). The sector’s been ripping in the last two weeks on the heels of good earnings and a strong consumer backdrop. It seems to mark a change in sentiment from last year, when fears of online competition plagued the industry.

Total option volume in RH was 5 times the average in the last month, with calls outpacing puts by a bullish 13-to-1 ratio.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.