Shares of
Grocery Outlet Holding Corp (GO) have been trending down over the past year, but have shown some signs of life in recent weeks. One trader sees the possibility for a rebound ahead.
That’s based on the May $35 calls. With 105 days until expiration, 4,554 contracts traded compared to a prior open interest of 109, for a 42-fold jump in volume on the trade. The buyer of the calls paid $0.38 to get into the trade.
With the stock last going for about $25, shares would need to rally $10, or about 40 percent, for the option trade to move in-the-money. That would still leave shares under their 52-week high just under $44.
Given the low profit margins of the grocery business, and a drop in earnings over the past year, it’s easy to see why shares have underperformed.
Action to take: Shares still look a bit pricey at about 23 times forward earnings here. However, they have shown some sign of moving higher in the last few weeks, so they could be a surprising performer in the months ahead. Shares do not pay a dividend at this time.
For traders, the calls are interesting, as an inexpensive play on a move higher in shares. Traders can likely nab mid double-digit gains simply on a rebound in shares in the coming weeks, potentially higher on some positive news development like strong earnings or a buyout offer.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.