Snack foods guru and bane of my waistline, Diamond Foods (DMND), is slated to slip into the earnings confessional after the close of trading tomorrow. Currently, Wall Street is expecting strong year-over-year earnings growth with only modest sales growth.
The stock has strong long-term price potential, but sentiment expectations are leaning bearish, which could provide an opportunity for options traders to bet against the grain ahead of tomorrow’s report.
Diving into the numbers, the consensus is looking for earnings to rise 36% to 15 cents per share at Diamond Foods. Revenue, however, is expected to rise a meager 2.3% to $195.3 million.
Still the company has bested expectations in all but one of the past six reporting periods, potentially leading to a second-quarter whisper number of 16 cents per share for Diamond Foods.
Pulling back for a broader look at the brokerage bunch, coverage is thin on DMND stock. According to Thomson/First Call, the shares have attracted only seven ratings total — five “buys,” one “hold” and one “sell.” The 12-month price-target, meanwhile, comes in at $32.50, representing a modest premium of about 13% to yesterday’s close.
Where analysts have neglected coverage, short sellers have decided to take a stand. As of the most recent reporting period, some 1.5 million shares of DMND stock were sold short. These short positions represent a healthy short-to-float ratio of 5.8% and could provide fuel for a moderate short-covering rally if Diamond Foods can impress with tomorrow’s quarterly report.
Options traders are close to throwing in with the short selling crow. Currently, DMND’s June/July put/call open interest ratio arrives at 0.91, with puts in near parity with calls. In the June series, this ratio rises to 0.95 and indicates that short sellers are likely not in a rush to cover their positions. Peak open interest levels lie at the $27 strike, where 5,712 puts currently reside, and the $30 strike, which is home to 5,415 calls.
Click to Enlarge Overall, June option implieds are pricing in a potential post-earnings move of about 8% of DMND stock. This places the upper bound at $31.33, while the lower bound lies at $26.67. You’ll note that these levels roughly correspond with key June open interest levels, leaving some wiggle room for savvy traders to rake in a profit on the right play.
Technically, DMND faces overhead resistance in the $31 region, which is home to its 50-day moving average. Above that, however, the next area of significant resistance doesn’t emerge until $34 — DMND’s April high. As for support, the $28 area is ripe with trendline support, as DMND’s 10-, 20- and 200-day moving averages all call the region home. The next significant area of support lies in the $26-$26.50 region.
2 Trades for DMND Stock
Call Spread: With sentiment indicators pointing toward either light or bearish coverage, and plenty of room to resume its longer-term uptrend, I’m inclined to look for bullish trading opportunities for DMND stock. Traders looking to follow the brokerage community’s bullish (albeit limited) lead might want to consider a Jun $29/$31 bull call spread.
At last check, this spread was offered at 53 cents, or $53 per pair of contracts. Breakeven lies at $29.53, while a maximum profit of $1.47, or $147 per pair of contracts, is possible if DMND closes at or above $31 when June options expire.
Put Spread: On the other hand, retail and consumer goods companies haven’t fared extremely well this quarter. Traders wanting to side with the bears on DMND ahead of earnings might want to consider a Jun $27/$29 bear put spread. At last check, this spread was offered at 77 cents, or $77 per pair of contracts. Breakeven lies at $27.23, while a maximum profit of $1.23, or $123 per pair of contracts, is possible if DMND closes at or below $27 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
