Information technology consulting company
DXC Technology (DXC) sank nearly 30 percent last Thursday, as the company missed on earnings and cut guidance. One trader is betting on a further drop in the months ahead.
That’s based on the January $15 puts. With 164 days until expiration, 4,710 contracts traded compared to a prior open interest of 110, for a 43-fold rise in volume on the trade. The buyer of the puts paid $0.87.
Shares closed near $19 following the earnings drop, so shares would need to drop another $4, or just over 21 percent for the option to move in-the-money. The drop would also take shares to a new 52-week low.
Over the last 5 years, shares have only traded lower in early 2020. Earnings are now down by over two-thirds over the past year.
DXC is priced at 7 times forward earnings, which sounds inexpensive, unless the company sees a further decline in revenues. With IT spending down, and with many tech companies laying off workers, DXC could see further declines ahead.
Action to take: Interested investors can likely get into shares closer to $15 in the months ahead. DXC doesn’t pay a dividend, so there’s no rush for investors to get in.
For traders, the January puts are inexpensive and have plenty of time to play out. Traders can likely see high-double-digit gains or better.
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.