Chewy Presents a Few Options for Investors Off of Earnings

Chewy.com (CHWY) reports earnings after the market close on Tuesday. We don't have a lot of names reporting Tuesday tonight, so I expect this one will get a lot of attention, especially given the huge run higher over the past three months.

The shares have more than doubled from their March low and gave investors a picture-perfect bounce off the 50-day simple moving average to end the month of May.

The stock pushed higher from a bullish flag Tuesday morning but has faded a bit as the day has progressed. It's not likely the technical setup will have a major influence on the stock's response to earnings although I see support around $48 and $45 should the company fail to live up to investors' expectations.

I do anticipate bulls will want to see sales and guidance above estimates. Unfortunately, Chewy doesn't have history on its side when it comes to that. This will be our first glance into whether Covid-19 not only spurred sales, but that the newcomers have remained customers. Chewy should be sticky (no pun intended).

The options market has priced a 13.4% move by close of trading this Friday. The post-earnings one-day moves have run in the mid-single-digits over the past four reports landing in the 5% to 6.5% range, with intraday maximum moves in the 8% to 9.5% range. It's after the first day that the stock begins to get loose.

With moves ranging from 5% to 17%, the option pricing becomes clearer. And after the big move in the stock over the past few weeks, the 13.4% anticipate move is near the top end of the spectrum for my range, but it's not an unfair price.

Sometimes the best trade from a risk versus reward perspective isn't the one in front of us today, but the one that will be presented to us tomorrow. Chewy has shown a propensity to move in a big way AFTER the first post-earnings close.

From the end of day one to the end of day 13, moves have been 30%, 15%, 12.5% and 8.75% over the past year. That means, if the straddles for June 26 expiration, currently priced at a move of 18%, were to come down into the 12% or less range near the close of trading Wednesday, they would represent an attractive risk-versus-reward setup based on the history of the stock.

I would add the caveat that an investor should prefer to see the move Wednesday mimic the historical moves of 5% to 7% change at the close. If we were to see a big move, especially a big drop of 15% or more, than I don't know that the setup will be worth pursuing. That being said, if the stock sells off to the $42 area, but doesn't fall below, then I would consider a long-side scalp with $40 as my stop based on buying the 50-day simple moving average.

At the time of publication, Collins had no positions in any securities mentioned.