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Despite Downgrade, Aflac Attracts Pre-Earnings Bulls

Andrea Kramer

Shares of insurance issue AFLAC Incorporated (NYSE:AFL) are lower today, after Evercore ISI downgraded the stock to "underperform" from "in line." The analyst predicted "modest downward pressure" from "challenges in Japan," as well as "negative interest rate impacts" as the Fed teases a possible July rate cut. Nevertheless, it looks like one options trader is placing a modestly bullish bet on AFL stock ahead of earnings next week.

Prior to today, Aflac stock had been quietly assailing new heights, notching a record peak of $57.18 yesterday. The equity has rallied roughly 24% so far in 2019, with recent pullbacks contained by its 20-day moving average. Today, AFL shares are down 0.5% at $56.28.

AFL stock chart july 16

As alluded to earlier, Aflac call options are hot today, despite the Evercore downgrade. So far, the equity has seen more than 5,600 calls change hands -- 12 times the average intraday volume. For comparison, fewer than 60 AFL puts have traded thus far. Today's put/call volume ratio of 0.01 is at the bottom of its annual range.

Digging deeper, almost all of today's volume is attributable to a bull call spread. On the International Securities Exchange (ISE), one trader bought to open 1,355 weekly 7/26 56-strike calls for $0.93 each. Then, to partially fund the position, the speculator simultaneously sold to open an equal number of weekly 7/26 57-strike calls for $0.43 each. As such, the investor initiated the trade for $0.50 per spread ($0.93 - $0.43).

The strategist will profit if AFL moves above $56.50 (bought call strike + net debit) by the close on Friday, July 26, when the weekly options expire. However, no matter how high the shares might move above $57, the sold calls limit the trader's profit potential to $0.50 (difference between strikes minus net debit).

Had the investor simply purchased the 56-strike calls, their profit potential would be theoretically unlimited, but their breakeven would be higher (at $56.93). However, the maximum risk on a lone long call would also be higher, at $0.93, compared to the $0.50 (net debit) risked with the spread.

The spread trader is likely betting on a post-earnings pop higher for Aflac next week. The insurance giant is slated to report earnings after the close on Thursday, July 25. What's more, AFL shares have moved higher the day after six of the last eight earnings reports, including a one-day surge of 4.3% this time last year.