U.S. Markets closed

CVS Options Bull Places 7-Figure Bet Before Earnings

Andrea Kramer

CVS Health Corp (NYSE:CVS) will report second-quarter earnings after the close on Wednesday, Aug. 7. Ahead of the event, it looks like one options trader may be betting big bucks on a post-earnings pop for the pharmacy chain.

CVS has seen roughly 36,000 calls and 28,000 puts change hands already today -- more than double the average intraday volume, and on pace for the 96th percentile of its annual range. Most of the activity is attributable to a massive spread at the weekly 8/9 55.50-strike call and 54-strike put.

Specifically, the trader may have bought to open 22,430 calls for $1.97 apiece. Then, to help fund the bullish position, simultaneously sold to open an equal number of puts for $0.65 apiece. If so, the speculator opened the position for $1.32 per spread, or about $2.96 million total (cost per spread x number of spreads x 100 shares per contract).

The trader's profit will increase the higher CVS shares move north of $56.15 (call strike plus net debit) before the options expire at the close on Friday, Aug. 9. However, while the sold puts chipped away at the net debit, they also leave the trader vulnerable to notable downside risk, should a negative earnings reaction send the shares south of $54.

History is on the bulls' side, though. CVS stock has moved higher after three of the last four earnings reports, including a one-day gain of 5.4% after earnings in May. Regardless of direction, the security has averaged a one-day earnings reaction of 4.5% over the past eight quarters.

CVS Health stock gapped lower in mid-February, following a poorly received full-year outlook, and subsequently plummeted to the $52 area by early March. Since then, this level has emerged as a foothold for the shares, with the $58 neighborhood keeping a lid on rally attempts. At last check, the security was up 1.4% to trade at $56.63.

CVS stock chart aug 1

Despite the stock's struggles of late, analysts remain bullishly biased. In fact, CVS sports 13 "buy" or better ratings from this group, compared to seven "holds" and not a single "sell."  Meanwhile, the consensus 12-month price target of $67.05 represents a premium of more than 18% to the stock's current perch, and stands in territory not charted since before the aforementioned bear gap. Should the company's earnings disappoint next week, a round of downgrades and price-target reductions could push CVS back toward support in the $52 area -- and below that sold put strike.