Option Action Meets the Zacks Rank

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ValueClick

VCLK is one of the world’s largest online marketing companies, but has definitely fallen off the radar since its heyday.   While that may be true, we might not want to ignore this stock, especially with call volume at 1000% of normal today. But let’s see what’s really going on behind the curtain.

ValueClick provides branding solutions as well as traffic, leads and sales solutions to its customers, among many other solutions mostly geared towards web-based advertizing and technology. 

Their revenues are closely tied to search volume, CPC (cost per click) and economic health.  If companies like Google, Yahoo, etc. are showing strong data, this will most likely reflect positively on VCLK.

Fairly Bullish Pre-AnnouncementOn June 29th, VCLK announced updated expectations for this quarter (Q2) and saw revenue coming in at the high end of their previously expected range of $155- $160 million. Executives noted that VCLK’s Media segment was on target to meet or exceed prior guidance, but there are still risks.

They also increased their share repurchase allocation by 100 million, which can certainly be viewed as a positive.  We will get full results from VCLK around July 28th (est).  News data and analysts’ opinions are fairly bullish going into that report.

Zacks RankVCLK is a Zacks Rank #2 (Buy) and is currently trading at roughly 13 times earnings, which puts it more in the “inexpensive” zone than one would think.    

The Zacks Consensus Estimate is for the stock to earn 22 cents in Q2; the most accurate estimate is also 22 cents, which gives this stock an ESP of 0%.  This essentially means that VCLK is not expected to “wow” investors at their next report.  Although, the ESP of 0 is likely due to the fact that they pre-announced.

They have managed to beat consensus estimates by an average of 45.4% over the past 4 reports.

From my vantage point, VCLK is leaning bullish to neutral, with its low stock price/valuation being the attraction here.

Options ActionNormally ValueClick sees an average of fewer than 250 calls traded per day across all of its strikes and months; yet today, almost 2600 calls had changed hands before noon.

The majority of the volume came in the August 19 calls where a trader bought 2,120 options this morning.  I know the trader was opening a new position being that the open interest was only 49.  I can also confirm that this was a buyer due to the increase in premium (implied volatility).

The trade cost $53,000 with the options costing 25 cents ($25 each).  The trader now controls 212,000 shares of stock, which is substantial being that VCLK trade an average of 1.2 million shares per day.

More importantly, this trader needs the stock to get to $19.25 by the third Friday in August to break even in the trade.  That equates to a 22% jump from the current price in less than 38 days.

Sure it could happen, but based on my calculations, the chances of VCLK getting to $19.25 are about 22%. The chance of it being above that level on August expiration are about 9.5%

In sum, this is a low probability trade with one caveat that could make the odds a bit better: earnings.

ValueClick will still report their numbers at the end of the month.  IF those results are exceptional, VCLK does have the potential to move.  In fact, the stock moved 30% (lower) last earnings report.

At least one trader believes that this quarter may bring just the opposite.

From my standpoint, VCLK looks fairly attractive here, and the Zacks Rank #2 gives me confidence.  While the option trade instills assurance as well, I think I’d take a more conservative approach and go with a longer-dated, slightly in-the-money option to take a bullish position ahead of the report. 

ValueClick is a good example of an option trade that falls in line with a stock’s potential; we will have to wait and see what happens on July 28th.

 Notes:Don’t ignore the underlying trends in the option markets.  Options are often where the “smart money” does a great deal of trading because they can operate with a certain degree of anonymity.  

Remember that this is not a guarantee of market direction, nor should you go and fire off a trade without conducting your own due diligence.  I am simply breaking down the logic of the trade and putting the pieces together.

Just because someone buys 5,000 call options, doesn’t mean that they are bullish on the stock.  Those calls could be purchased as a hedge to a very large short position or they could be only a part of a bearish spread that the trader is “legging” into.  The trader could also be closing out an existing BEARISH position!

By combining options action with solid fundamental data like the Zacks Rank, it helps stack the odds in our favor of targeting the real direction and intention of the big volume option players.

 Jared Levy is the Senior Equities Strategist for Zacks.com and editor of the Whisper Trader Service

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