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Bookseller Barnes & Noble (BKS) is slated to take its turn in the earnings spotlight before the opening bell Tuesday, Aug. 24. It's not exactly business as usual for Barnes & Noble, though -- with a proxy battle waging between Chairman Leonard Riggio and activist investor Ron Burkle, there's going to be an unusually harsh media glare on the quarterly results.
Of course, it's not just the financial media who will be eager to get a glimpse at Barnes & Noble's performance. Investors will also be chomping at the bit ahead of the firm's annual meeting, because Burkle has proposed a slate of three nominees for the retailer's board, and Riggio's seat is among those up for reelection. As Reuters' Phil Wahba explained it on Friday, "the extent of the damage is likely to affect who shareholders vote for at next month's annual meeting."
In June, Barnes & Noble predicted a first-quarter loss of 85 cents to $1.15 per share, thanks to hefty expenses related to its Nook e-reader. Analysts surveyed by Thomson Reuters, on average, are looking for a loss of 80 cents per share on revenue of $1.42 billion.
Options traders appear to be anticipating an upside surprise, judging by a recent preference for call options. Its 10-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE) call/put volume ratio stands at 4.23, as bullish bets have more than quadrupled their bearish counterparts in recent weeks. On Friday, the stock's September 15 call was most active, with this strike gaining 744 contracts in open interest over the weekend.
However, with more than 42% of the security's float sold short, it's quite possible that some of those calls were purchased by short sellers looking to limit their upside risk ahead of earnings. By purchasing calls to complement a short stock position, the trader can effectively cap the risk threshold at the strike price of the option.
Traders should be aware that Barnes & Noble's high short-to-float ratio could trigger a volatile post-earnings move, whether higher or lower. And happily, despite the proxy battle and looming earnings report, options on BKS are still fairly priced at the moment.
The stock's September 16 call is pricing in implied volatility of 53.9% at last check, while the September 14 put carries implied volaitliy of 64%. By contrast, its one-month historical volatility stands at 78.8% -- which means these front-month options are fairly inexpensive at the moment. In other words, traders looking to capitalize on a drastic post-earnings price swing can feel free to implement a long straddle or strangle without paying too much for implied volatility.
Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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